Annual Conference

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International Macroeconomics, Money & Banking, Senior Fellows/Fellows

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May 2013

Macroprudential Policy and Zombie Lending in Korea

During the housing boom in the mid-2000s, Korea used the Loan-to-Value ratio (LTV) regulation and Debt-to-Income ratio (DTI) regulation to limit the expansion of mortgage financing and the rapid rise of housing prices successfully. The limit on mortgage financing, however, made many banks to look for other opportunities to extend credit. The banks ended up competing to lend to small and medium enterprises (SMEs), some of which had questionable quality. This paper shows that increased loans to the non-performing SMEs led to the zombie problem that Caballero et al. (2008) found for Japanese non-performing companies helped by their creditors. Similar to the Japanese zombies, we find the Korean zombies discouraged healthy companies from expanding. We also find the productivity gap between zombies and non-zombies increase as the proportion of zombies in the industry increases.
Keywords: Macroprudential Policy, Zombie Lending, Korea
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