Household loan portfolios and financial characteristics of Korean banks

Abstract

This study contributes to understanding the supply mechanism of household loan portfolios in Korea, where the ratio of household debt to GDP is high. This study conducted an empirical analysis of how banks' financial characteristics including capital adequacy, financial soundness, and profitability affect banks' supply of variable‐rate household loans that are sensitive to increases in the central bank's base interest rate and have higher possibility of loan default, considering time lag in terms of banks' risk‐taking behaviour. The main results suggest that the proportion and change of variable‐rate loans are significantly affected by the level and change of financial characteristics. In particular, a high level of capital adequacy enabled banks to supply risky loans by increasing their risk tolerance.