Déjà Vu: CEO overconfidence and bank mortgage lending in the post-financial crisis period

Abstract

This study examines the impact of CEO overconfidence on banks’ mortgage lending decisions in the post-financial crisis period. We find that banks with overconfident CEOs are more likely to approve mortgage loan applications of risky borrowers. Overconfident CEOs contribute to the riskiness of mortgage lending by encouraging banks to take on more risk. The positive effect of CEO overconfidence is more pronounced in banks with powerful CEOs, weak governance, low levels of technology adoption, and limited competition. Although improved bank regulations and intensified monitoring following the crisis have reduced the magnitude of this positive impact, it still exists, albeit to a lesser extent. Our findings remain consistent after endogeneity corrections and a battery of robustness tests. Overall, this study provides additional evidence of CEO overconfidence in shaping bank lending policies.