The existence and motivations of irrational loan herding and its impact on bank performance when considering different market periods

Abstract

This study first investigates whether Taiwanese banks exhibit irrational loan herding after rational herding factors based on industrial growth, profitability and credit rating are controlled in the model of total loan herding. Our results confirm the evidence of irrational loan herding for most types of banks except for government-owned banks (GOBs). Compared with other periods, the irrational herding behavior of small banks during the crisis and expansionary periods is significantly greater, and the irrational herding behavior of GOBs during the presidential election period is significantly greater. We then clarify the motivations behind irrational loan herding, including characteristic herding and investigative herding. Next, we detect the impact of irrational loan herding on bank performance. We find that the irrational loan herding of POBs, independent banks and small banks has more significantly negative impacts on their performance than does the irrational herding of their counterpart banks. Finally, we investigate whether irrational loan herding during specific market periods has a more significantly harmful effect on bank performance. Our results show that there is a greater negative impact of irrational loan herding by privately owned banks than by GOBs on bank performance during the crisis and expansionary periods, while the situation is the opposite during the presidential election period.