IMF: "Artificial Regulation of Household Loans Increases Corporate Loans... Risk Also Rises"

IMF Working Paper 'Balloon Effect from Macroprudential Regulation'

When Household Loans Tighten Sharply During Liquidity Expansion,
Commercial Bank Loans Concentrate on Large Corporations...Corporate Soundness Deteriorates

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] There are concerns that abruptly implementing artificial household loan tightening policies, such as loan-to-value (LTV) and debt-to-income (DTI) ratio regulations, ultimately allows only large corporations to easily take on debt. When the government introduces household loan regulations during periods of rapid money supply expansion, commercial banks tend to increase corporate lending instead, offering loans more generously to companies than usual. In such cases, companies that borrow beyond their capacity are more likely to become insolvent in the future. Moreover, corporate loans during these times tend to be concentrated on large corporations, providing little benefit to small and medium-sized enterprises (SMEs).

According to the Bank of Korea's "Latest Overseas Academic Information" on the 17th, the International Monetary Fund (IMF) recently included these findings in a working paper titled "The Balloon Effect of Macroprudential Regulations." The IMF analyzed individual data from 29 advanced and emerging countries, including Korea, and found that implementing household loan regulations triggered a "balloon effect," increasing the risk of misallocation in corporate lending. This phenomenon was more pronounced during crisis periods with rapid money supply expansion, such as the recent COVID-19 situation. Indicators such as ▲total debt to total assets ratio of companies ▲debt overhang measure (total debt to operating profit) ▲interest coverage ratio (operating profit to interest expenses) all increased.

Between 2002 and 2018, the level of household and corporate loan regulations in 29 countries. Household loan regulations increased sharply, while corporate loan regulations were relatively less stringent.

The IMF report stated, "During periods when the loan-to-GDP ratio is one standard deviation above average, i.e., during credit expansion, tightening macroprudential regulations on the household sector increases the risk of credit misallocation in the corporate sector by about 10% of a standard deviation." Considering that the risk of corporate credit misallocation was about 23% higher than the standard deviation just before the financial crisis when loans surged, it is possible to gauge how much tightening household loans abruptly raises corporate loan risks.

During this period, growth-oriented SMEs did not easily borrow investment funds. The analysis showed that banks' corporate lending attitudes eased mainly toward large corporations when household debt was tightened. Banks lent money to high-risk large corporate sectors but were reluctant to provide loans to smaller companies. The Bank of Korea noted, "This suggests the need to be cautious of the balloon effect, where macroprudential policies targeting specific sectors impact other sectors." It added, "Considering that the balloon effect intensifies as the money supply expands faster, policies like household debt measures should be implemented during periods of slower money supply expansion to minimize side effects." The IMF used data from individual countries and companies spanning 2002 to 2018 for this study.

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