The Optimal Leverage Ratio of Credit Guarantee Institution: Case of Local Credit Guarantee Foundation in South Korea*

Abstract

This study aims to estimate the optimal leverage ratio of the Local Credit Guarantee Foundation (hereafter LCGF), which plays an important role in financing small and micro businesses in South Korea. The optimal leverage ratio refers to the rate of credit guarantee balance to capital at which the guarantee system can be soundly and stably operated while meeting the credit guarantee demand. The optimal leverage ratio of LCGF is derived using three methods: a sustainable budget constraint-based leverage ratio, an institutional objective maximizing leverage ratio, and a BIS ratio-based leverage ratio. Assuming that the average trend of the past ten years is maintained, the sustainable leverage ratio is evaluated to be 7.55. In addition, the institutional objective maximizing leverage ratio is estimated to be 7.24. When the optimal BIS ratio increases from 11.5% to 14%, the BIS ratio-based leverage ratio is evaluated to be between 8.39 and 10.21. The leverage ratio at the end of 2020, which was 9.16, is appropriate when using the BIS ratio, considering the COVID-19 crisis. However, it is judged to be slightly higher than the sustainable leverage ratio or the institutional objective maximizing leverage ratio.