Abstract
In this article we present a technique for estimating the effect of herd behavior in case of granting loans on the market for corporate lending. Given that expert opinion as well as bounded rationality plays a key role in the process of decision making on a credit application’s approval, overestimation of other players’ actions may have a potential for worsening the quality of corporate loans portfolio of a commercial bank. In order to mitigate such an effect it is proposed to use the developed indicators as an additional tool in evaluating a loan application. Also in the result of the carried out research we’ve revealed a cross-country pattern of herding effect’s development on the credit market: the better the quality of national market’s institutions the stronger is the coordination of credit market players in form of herd behavior. One of explanations of the revealed paatern may be linked with the competition issue on the credit market. DOI: 10.5901/mjss.2014.v5n20p516
Highlights
Nonoptimality of existing methods of credit risk assessment raises the sustainability of the overdue debts and loan losses as well as procyclical nature of their movement
The purpose of this study is to identify allocation channels of herd behavior through which it manifests in the behavior of commercial banks; to develope indicators to measure each of these channels and determine the degree of "herding" behaviour of commercial banks on the credit market
Correlation analysis of the dispersion of the values of the profitability of the country's largest commercial banks, which account for over 50% of the loaned funds (Fig. 1), shows that as the economic system of the country and its credit market develops the effect of herd behavior increases
Summary
Nonoptimality of existing methods of credit risk assessment raises the sustainability of the overdue debts and loan losses as well as procyclical nature of their movement. On the upward phases of the credit cycle, underestimation of credit risk results in its excessive accumulation. The solution to this problem is directly connected, on the one hand, with improving the quality of theoretical notions about credit risk, on the other - with optimization of methods of its management. At present only the second aspect of this issue has attracted attention of many researchers and experts in the world. The need to adapt the theoretical framework in line with the existing realities has been sidelined. One of the main gaps in this case is the number of non-viable assumptions that offset a large part of the effort
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