A study on relationship between countercyclical capital buffer and credit risk: evidence from South Korean banks

Purpose This study examines whether Korea's May-2024 countercyclical capital buffer (CCB) activation – the first emerging-market case in a highly household-indebted economy – reduces bank credit risk or triggers a balloon effect toward riskier lending. Design/methodology/approach Using a quarterly panel of Korean banks (2017.Q1–2024.Q1), I analyze four credit-risk dimensions (EPCR, PCR, CRT, CRE) with two CCB proxies via Arellano–Bond system GMM. Findings Tighter CCB is significantly associated with lower ex-post and potential credit risk, higher loss-provisioning tolerance and lower risk exposure. Effects are robust across both CCB proxies, and no Swiss-style balloon effect is detected. Research limitations/implications The short post-activation window limits long-run inference. Future work can extend the sample and apply cross-country difference-in-differences. Practical implications Regulators in high-debt Asian economies can deploy CCB as an effective macroprudential tool that stabilizes bank credit risk without triggering shadow-banking substitution. Social implications By curbing household-debt-related credit risk, well-timed CCB activation protects borrowers, depositors and taxpayers, contributing to financial stability in economies where household debt exceeds GDP. Originality/value This paper provides the first evidence on CCB activation in an emerging market with extreme household leverage, jointly evaluating four credit-risk dimensions within a dynamic panel GMM framework and reconciling risk-mitigating and risk-shifting predictions.