"Lending Supply Drops Further at Financial Institutions When Gwangju and Jeonnam Companies See Sales Decline"

Bank of Korea Report on Corporate Sales and Regional Financial Responses

It has been found that when companies in Gwangju and Jeonnam experience a decline in sales, regional financial institutions reduce their lending supply more sensitively than nationwide financial institutions.

According to the joint report "Analysis of Heterogeneity in Regional Financial Responses to Corporate Sales Shocks" released on December 23 by Professor Lim Hyunjun of Chonnam National University’s Department of Economics and Yoon Changseok, Senior Researcher at the Bank of Korea’s Gwangju-Jeonnam Branch, when the corporate sales growth rate drops by 1 percentage point, lending supply from regional financial institutions contracts by an additional 0.3 to 0.4 percentage points on average compared to nationwide financial institutions.

This suggests that regional finance is more likely to exacerbate local funding shortages or amplify shocks during economic downturns rather than serve as a buffer.

The survey found that regionally based financial institutions responded more conservatively to local economic recessions or deteriorating corporate performance.

In particular, an analysis of the sensitivity of financial institutions’ lending to corporate sales fluctuations by region showed that the figures were especially pronounced outside the Seoul metropolitan area, with Gangwon, Daegu-Gyeongbuk, and Gwangju-Jeonnam displaying relatively high sensitivity.

The main reasons identified were the small scale of financial institutions in these regions and their high dependence on the manufacturing industry.

Unlike the Seoul metropolitan area, these results reveal the structural vulnerabilities of local financial markets with limited funding channels: the smaller the bank’s asset size, the lower its profitability (ROA), and the higher its non-performing loan (NPL) ratio, the greater the reduction in lending in response to declining corporate sales.

The report suggested, "To strengthen the resilience of regional finance, it is necessary to increase capital and liquidity buffers, promote diversification of funding structures, refine differentiated regulatory and supervisory systems tailored to the characteristics of financial institutions, and improve the allocation structure of public sector deposits, among other measures."