Loan Growth Research Articles

The impact of prudential toolkits on loan growth in Central and Eastern European banking systems

This paper examines the effects of prudential policy on loan growth in 11 Central and Eastern European banking systems, spanning the period from 2000 to 2015. Based on the measures taken by the authorities of our sample countries, we build several prudential indices. Additionally, we control for the effects of several country-specific factors and bank-specific characteristics. Finally, we test the homogeneity of these effects, accounting for cycle, ownership, and bank effects. Generally, the empirical findings reveal a negative correlation between prudential toolkits and credit growth, with a conspicuous impact for tools targeting lending activity. We see that the effects of a change in the lending framework on loan growth are heterogeneous when we account for crisis and cycle patterns. Furthermore, the interaction between ownership and crisis reveals that, in normal times, foreign banks recorded higher loan growth compared to domestic banks. The opposite is true in turbulent times. The analysis of interactions between credit-based measures and bank-specific variables show that the effects of prudential actions depend on the bank size and leverage.

Is Islamic Banking More Procyclical? Cross-Country Evidence

This paper investigates the cyclicality of Islamic banking relative to conventional banking. It examines whether loan growth and profitability have a different sensitivity to economic growth for Islamic banks and for conventional banks. We used panel data from 525 banks covering 16 countries with dual banking systems spanning the period from 2008 to 2018. We found no difference in lending cyclicality: Islamic banks and conventional banks both have procyclical lending behavior. Profitability, on the other hand, is procyclical for Islamic banks but not for conventional banks. Our findings support the view that Islamic banking presence does not contribute to strengthened economic stability.

The Impact of Federal Home Loan Bank (FHLB) Advances on Small Business Lending by Community Banks—2010–2016

Abstract In this paper, we examine the relationship between small business loan growth and growth in core deposits and Federal Home Loan Banks (FHLBs) advances from 2010 to 2016. Controlling for other effects, we find that the relationships between small business loan growth is positively and significantly related to both FHLB advance growth and core deposit growth, with the coefficient on advance growth being significantly larger than the coefficient on core deposits over the entire sample period. We also tested whether this relationship changed after 2014:3 reflecting the Federal Reserve’s relaxation of the regulatory burden on smaller banks. We find that the relationship between loan growth and core deposit growth became more positive after the change, but the relationship between loan growth and FHLB advance growth did not. As a result, we could no longer reject the hypothesis that the coefficient on core deposit growth was equal to the coefficient on FHLB advance growth after 2014:3. This provides some empirical support that the regulatory changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) influenced small business lending by strengthening the impact of the growth in core deposits on the growth of small business lending, complementing the work of Bordo and Duca (2018) that changes in DFA had some unintended negative consequences for lending to small businesses. It also suggests that lowering the regulatory burden faced by community banks (which have a larger proportion of core deposits to total assets than non-community banks) could improve the incentive to increase small business lending. It also implies that FHLB advances remain an important funding tool at the margin to give commercial banking organizations greater liquidity and flexibility in funding their balance sheets.

Political uncertainty and city bank lending in China: Evidence from city government official changes

Using data hand collected in China between 2001 and 2016, this paper examines how political uncertainty affects city bank lending. Our results show that political uncertainty causes banks to significantly increase loan growth. These results are moderated by the characteristics of government officials, bank characteristics, and the degree of marketization. Our results further show that changes by government officials increase medium-term loan growth, mainly for the real estate and public utilities sector. Finally, we show that city government official changes increase bank lending and, thus, increase credit risk, that is, bank lending has a mediating effect.

THE USE OF US' INDEX THEORY TO ENHANCE QUALITY OF LOAN WITHIN BANKING INDUSTRY AND FINANCIAL INSTITUTIONS CASE STUDY: BANK ABC

ABSTRACTThe economic crisis has been decreased the performance of Banking Industry in Indonesiaas reflected in the decreasing of Loan Growth and the increasing of Non-Performing Loans (NPLs)ratio since 2015. Increasing NPLs was followed by increasing cost of loan and decreasing ROA ofBanks and others financial institutions therefore Bank should be innovate to enhance its loanquality.This study was conducted to determine influence of leverage towards profitability ratios of68 companies which are debtors of Bank ABC in Performing Loan quality within two groups of US'Index value and tested by Correlation and Linear Regression Analysis. Based on the research’soutputs, it was concluded that in group of US’ Index < 1 leverage has been influencing negativelyto its profitability while on another group, with US’ Index > 1, leverage has been influencingpositively. Those conclusions were reinforced by the decline trend of US 'Index value on financialperformances of 21 debtors were included in the category of watch-list debtors as well as provenin the study case of debtor which is now included into the category of non-performing loans. Thisstudy has shown that US’ Index theory could be implemented in all stages of loan process, such asto analysis the repayment capacity of applicants at the front end, as loan monitoring system atthe middle end, and as a guidance in loan restructuring and collecting repayment at the back endstage. Therefore, this study suggests the use of US’ Index theory as a credit risk control strategyto reducing NPLs in Banks and Financial Institutions in order to enhance its loan quality andgenerate sustainable profit.Key words: NPLs, Cost of Loan, US’ Index, Capital Structure, Linear Regression.

Eksterni i interni makroekonomski šokovi u slučaju malih ekonomija sa valutnim odborom

External and internal economic shocks can threaten the macroeconomic stability of a small economy. In the currency board regime, there is no role for the Central Bank as a macroeconomic stabilizer in the event of an external or internal shock. In this paper, the research is based on the analysis of eight countries with small economies with currency boards or discretionary monetary policy. The impact and connections between changes in EURIBOR, interest rates, inflation measured by the GDP deflator, money supply and GDP in the period 1997-2015 are analyzed. The paper proves that in countries with a currency board, whose regimes have a harmonized relationship with the European Central Bank and EURIBOR, interest rate shocks are less pronounced. The analysis of the links between EURIBOR, interest rates, money supply, inflation and GDP is not statistically significant in the "experiment" countries. In the control sample of countries with a variable exchange rate, the situation is heterogeneous for individual countries, but statistical significance has been determined in relation to EURIBOR and inflation. We conclude that EURIBOR may be one of the generators of exogenous shocks. In the case of Bosnia and Herzegovina (B&H), there are much more significant internal transmission mechanisms that lead to macroeconomic imbalances. The growth of deposits was preceded by the growth of loans and money supply. This led to a fall in interest rates which the Central Bank of BiH (CBB&H) could not influence due to the currency board. However, the fall in interest rates did not yield the expected results. GDP has shrunk, inflation is falling, while at the same time the high unemployment rate has remained unchanged. The nominal exchange rate of the domestic currency was determined by law, but there was an appreciation of the real exchange rate, which affected the increase in the foreign trade imbalance. The result of the currency board is price stability, nominal exchange rate stability and money supply growth. Negative results are: appreciation of the real exchange rate, faster growth of imports and maintaining a very high unemployment rate. Macroeconomic developments in the BiH economy do not always have the right course that can be expected in mature economies. The achievements and applicability of standard macroeconomic policies are very limited.

Banking Sector Performance During the COVID-19 Crisis in the Republic of North Macedonia

This paper explores the effect of the COVID-19 crisis on commercial banks in theRepublic of North Macedonia. It has used data from financial statements of the banks inorder to find out if there are changes in banks profitability, as well as banks exposureon liquidity and credit risk in the period of Corona crises and before the crises.Furthermore, we explore if there are changes in the credit and deposit potential of banksand whether there are an increase in non-performing loans. We conclude that even thebanking sector has faced several challenges, it maintained its stability and contributedto mitigation of the consequences of the corona crisis. This, on the one hand, is a resultof public confidence in the banking system, but, on the other hand is due to the rapidreaction of the National Bank of Republic of North Macedonia. In 2020, the bankingsystem made a higher profit compared to the previous year. Net interest income wasthe most significant in the structure of total income and did not decrease in 2020compared to 2019. Banks ensured solid growth of loans and deposits as well as properlymanaged their credit and liquidity risk. It is important to emphasize that banks havemaintained a stable and solid liquidity position, which is one of the main pillars of thestability of the banking system, especially important in times of crisis. There was alsono increase in credit risk, on the contrary there was a decrease in the percentage ofnon-performing loans. This is primarily due to regulatory measures taken by theNational Bank in the field of credit risk management and the introduction of thepossibility of temporary deferral of loans.

Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy

This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.

Can foreign ownership reduce bank risk? Evidence from Vietnam

This study investigates the impact of foreign ownership on bank risk in Vietnam between 2006 and 2015. Our findings show that foreign ownership can lower bank risk, suggesting that the State Bank of Vietnam should further remove restrictions on foreign investments in the banking system. The findings also indicate that higher bank risk is associated with greater technical efficiency, suggesting that the skimping-cost hypothesis may exist. The same conclusion is true for large banks, for banks with higher liquid assets, and those with greater loan growth. More interestingly, we do find evidence that state-owned banks with a greater level of foreign share are likely more stable. This is also true for the case of listed banks with a higher level of foreign ownership.

Payment Risk and Bank Lending

Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission.

Cultural values of parent bank board members and lending by foreign subsidiaries: The moderating role of personal traits

In this study, we investigate how the average cultural values of parent bank board members affect lending by foreign subsidiaries and how this influence is moderated by board members’ personal traits. Using a new dataset that includes information on foreign banks and their parent companies from 66 and 29 countries, respectively, we find that loan growth of foreign subsidiaries is faster when parent boards exhibit, on average, higher uncertainty avoidance and power distance but lower individualism and indulgence. Notably, the identified regularities are significantly moderated by gender, busyness, and firm ownership of parent bank board members.

Does Loan Growth Impact on Bank Risk?

Does Loan Growth Impact on Bank Risk?

Banks' Risk-Taking within a Banking Union

We study the relationship between banks’ size and risk-taking in the context of supranational banking supervision. Consistently with theoretical work on banking unions and in contrast to analyses emphasising incentives underpinned by the too-big-to-fail effect, we find an inverse relationship between banks’ size and non-performing loan growth for a sample of European banks. Evidence is provided that the mechanism operates through the enhanced organisational efficiency of the supranational set-up rather than incentives alignment among the supervisors and the banks. JEL Classification: F33, G21, G28, G32, C20

TARP from the Banks’ Perspective: Evidence from Conference Calls

Using earnings conference calls, we investigate banks’ views of the Troubled Asset Relief Program (TARP). Most banks in our sample did not plan to lend out the funds and our regressions confirm that they did not. The evidence suggests that TARP’s price diminished its usefulness in expanding credit supply. In contrast, banks more often expressed favorable views of the program in terms of its impact on capital ratios. We find that banks often described loan demand during the sample period as weak, but lack of demand does not explain the anemic loan growth that occurred after the TARP injections.

Uncovering Heterogeneous Regional Impacts of Chinese Monetary Policy

This paper applies causal machine learning methods to analyze the heterogeneous regional impacts of monetary policy in China. The method uncovers the heterogeneous regional im-pacts of different monetary policy stances on the provincial figures for real GDP growth, CPI inflation and loan growth compared to the national averages. The varying effects of expansionary and contractionary monetary policy phases on Chinese provinces are highlighted and explained. Subsequently, applying interpretable machine learning, the empirical results show that the credit channel is the main channel affecting the regional impacts of monetary policy. An imminent conclusion of the uneven provincial responses to the “one size fits all” monetary policy is that different policymakers should coordinate their efforts to search for the optimal fiscal and monetary policy mix.

Abnormal loan growth and bank risk-taking in Vietnam: A quantile regression approach

We empirically investigate and present evidence of nonlinearity and heterogeneity in the impact of abnormal loan growth on risk-taking in the Vietnamese banking system between 2007 and 2019, using ...

Loan Growth and Bank Performance: A Panel ARDL Approach

This paper analyzed the effect of loan growth in three performance aspects, profitability, stock return and credit risk of Nepalese commercial banks applying the panel autoregressive distributed lag (ARDL) approach. To avoid the effect of the merger on loan growth 8 banks which have not merged with or acquired other institutions are taken as sample and 8-year data from each sample bank from 2012- 2019 has been sued in the study. The result showed that none of the three performance indicators is affected by the loan growth in the long-run. It is also found that the credit risk of banks does not change with the change in loan growth in the short-run as well. This indicates that banks are not aggressive in their lending. However, profitability and stock return are affected positively by the loan growth in the short-run. The findings from this study suggest to the investors in the stock market to choose the stock of bank with higher loan growth.

Does investor sentiment affect bank stability? International evidence from lending behavior

We study the impact of investor sentiment on bank credit and how changes in lending may affect bank stability. We analyze a sample of 2,673 banks from 127 developed and developing countries during the 1997–2016 period. Our results indicate that periods of high investor sentiment positively affect bank lending and encourage bank risk-taking through the increase in the amount of loans granted which, in fact, reduces bank stability. We find that the impact of investor sentiment on bank stability through changes in growth in bank loans is less negative in countries where creditor rights protection is greater, in terms of both collateral and bankruptcy. During systemic banking crises, the negative effect on bank stability was weaker since any increase in bank credit supply provoked by investor sentiment was counteracted by the crisis.

Exploring the Factors that Determine Flow of Agricultural Credit to Indian States

The issue of agriculture and agricultural credit has always gained importance in the context of India. The present research looks at various important aspects of agricultural credit which include growth trends and determination of factors that influence flow of credit to the different states. The findings are based on analysis of twenty-nine states for the period 2007-08 to 2017-18. The empirical research shows wide disparity across regions with the maximum flow to the southern region and the minimum to the north-east of the country. The study traces the growth in agricultural loans and finds that nature of the curve is in the quadratic form where the rate of decline is much less compared to the rapid rise in the growth of loans in all the regions. With regard to the panel regression model, cropping intensity, lending rate and inflation rate have a significant effect on flow of credit to states (at 1% level). However, though the share of agriculture in the state GDP matches the expected sign, the coefficient is not significant even at 10%. The study is a unique one which is an improvement over the earlier studies. However, non-availability of data for all states and exclusion of non-financial considerations at the state level are limitations of the study.

The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom

Using a sample of listed banks in the Asia-Pacific region from 2000 to 2016, this paper documents that higher market power reduces risk taking but increases loan growth and performance in banking. This highlights the "bright side" of bank market power in general. However, the positive effect of market power on bank stability is more pronounced for well-capitalized banks, although their performance tends to decline, and loan growth is unaffected by market power. Hence, bank capitalization plays an important role in strengthening financial stability due to an increase in bank market power. Moreover, banks with higher market power located in countries with a lower degree of financial freedom exhibit lower riskiness, higher loan growth, and better performance. Greater control by authorities in the financial sector is essential, not only to enhance financial stability, but also to boost financial intermediation and bank performance following an increase in bank market power.