Bank Lending Behavior Research Articles

Bank lending behavior in emerging markets

This article sheds further light on the bank lending behavior of Vietnam, an important emerging market. Motivated by the fact that most of emerging economies tend to finance economic growth by bank lending, we analyze the determinants of bank lending using a sample of Vietnamese banks. Employing a number of econometric estimation approaches for robust result, we find that bank lending behavior is significantly depending on bank specific characteristics and macroeconomic factors. We do not find a significant impact of bank market structure on bank lending. The current paper has strong implications in the context of Vietnam where the problem of high non-performing loans has taken heavy toll on the economy.

Rollover Risk and Bank Lending Behavior: Evidence From Unconventional Central Bank Liquidity

We show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks' exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy.

Detecting The Monetary Policy Lending Channel In Lebanon

The transmission mechanisms of monetary policy through commercial banks captured great attention by academics and central bankers. Despite the huge volume of research, there is no absolute agreement about the impact of the change in the monetary policy on commercial banks. With reference to the bank lending channel theory, this study aims at detecting the long- and short-run impacts of four monetary policy tools exploited by the central bank of Lebanon to guide banks who are lending to the private sector. The study covered the period January 1992-December 2016 using monthly data. The aggregate credit granted to the resident private sector was used as the dependent variable, while bank capital, money supply, interest rate, and the inflows of non-resident deposits serve as independent variables. The Vector Error Correction Model (VECM) was adopted in this study as it does not require the variables to be originally stationary. This model is able to reveal the potential long-run causal relationship between exploited time series. Moreover, the Wald test was performed as a complementary test to examine the existence of short-run effects on bank credit. The Vector Error Correction Model revealed a long-run impact running from money supply, while the other three variables did not transmit changes in monetary policy towards bank credit. Besides, the Wald test has shown a short-term impact running from non-resident deposits towards bank lending. Additionally, the Granger causality test demonstrated that non-resident deposits have a causal effect on bank credit, thus it helps in predicting the future trend of bank lending. In contrast, both bank capital and interest rate didn't have any significant effect on bank lending behavior in Lebanon on both short- and long-run. The obtained results have important policy implications which suggest that if monetary policy aims at expanding (contracting) bank lending through monetary easing (tightening), it should increase (decrease) money supply to achieve a long-run impact. However, it has to encourage (discourage) the inflow of non-resident deposits to achieve a short-run impact. Additionally, the results suggest that in Lebanon, changes in bank capital and interest rate will not cause shifts in the supply of loans.

Wholesale Fund Vulnerability and Bank Lending Behavior

Wholesale Fund Vulnerability and Bank Lending Behavior

The Effects of Quantitative Easing on Bank Lending Behavior

Banks’ exposure to large-scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, affects lending following unconventional monetary policy shocks. Using a difference-in-differences identification strategy, this paper finds strong effects of the first and third round of quantitative easing (QE1 and QE3) on credit. Highly affected commercial banks increase lending by 2% to 3% relative to their counterparts. QE2 had no significant impact, consistent with its exclusive focus on Treasuries sparsely held by banks. Overall, banks respond heterogeneously, and the type of asset being targeted is central to QE. Received January 13, 2016; editorial decision January 18, 2017 by Editor Philip Strahan.

The impact of central clearing on banks’ lending discipline

In this paper, I investigate the impact of central clearing in credit risk transfer markets on a loan-originating bank's lending behavior. Under the current market regulation, central clearing undermines banks’ lending discipline. The regulatory design of the credit risk transfer market in terms of capital requirements, disclosure standards, risk retention, and access to uncleared credit risk transfer can mitigate this problem. I also show that the lending discipline channel is an essential element of the impact of central clearing on banks’ loan default loss exposure, which is a first-order consideration for systemic risk analysis.

Bad Loans and Resource Allocation in Crisis Years: Evidence from European Banks

The aim of this study is to explore the relation between loan portfolio quality and lending in European banks over 2005-2014. We focus on lending behavior of banks from distressed countries since the Euro sovereign debt crisis. Our results confirm the existence of a negative nexus between poor loan quality and lending, since a higher NPL ratio explains a reduced loan growth and a lower allocation to loans at the advantage of government debt (as a percentage of total assets). Such an impact on lending and reallocation effect are strong and consistent across specifications and over and above other factors that may affect credit supply.

Bank versus nonbank financial institution lending behaviour: indictors of firm size, risk or ownership?

ABSTRACTUsing 1251 matched commercial loan deal terms of listed companies over the period 2003–2014, we examine the heterogeneity of lending behaviours of bank and nonbank financial institutions. The results show that large firms have a higher likelihood of getting loans from nonbank financial institutions. Compared to banks, nonbank financial institutions are more likely to provide credit help to high operation risk firms. State-owned listed firms have a higher probability to get finance from nonbank financial institutions than private firms, which highlights the situation that private firms are in a weak position to get credit help from China’s financial system. Moreover, the process of increasing the banks’ noninterest income ratio tends to drives firms to borrow from nonbank financial institutions.

The Bank Lending Channel of Monetary Policy Transmission: A Dynamic Bank-level Panel Data Analysis on Tanzania

This study uses dynamic panel data estimation models, employing annual bank-level data spanning the period 2001-2011, to empirically investigate whether or not changes in the monetary policy in Tanzania influence bank lending behaviour, i.e., existence of a bank lending channel (BLC). It also examines the distributional effects of the monetary policy on banks with different balance sheet characteristics and ownership structures. The findings lend support to the hypotheses that, first: BLC operates in Tanzania, suggesting that bank loans are important channel through which monetary policy shocks are transmitted to the economy. The findings mirror the arguments that the banking sector still dominates the financial system in the country, whereas money, capital, and real estate markets are still at their infant stages. Banks account for about three-quarters of the financial sector’s assets, reflecting their dominance of sources of funding. Meanwhile, about two-thirds of bank funding comes from private sector deposits, probably constraining banks in offsetting the decrease in funds from deposits by raising funds from other sources. Second, banks react asymmetrically to policy changes influenced by size, capital strength, and ownership structure. The lending channel is stronger through domestically-owned banks and privately-owned banks than it is with foreign-owned banks and public-owned banks. The reason is that, for foreign-owned banks, they could enhance their capital through raising of equity abroad and/or benefit from retained earnings; while for public-owned banks, it could be because they are not under pressure to make profit and, therefore, may opt not to cut-down their loans following a monetary policy shock. The policy implications are that, in assessing the stance of the monetary policy, beside short-term interest rates, it is critical for the monetary authority to trace banks reaction to monetary policy changes as reflected in loan supply to the private sector. Such investigation should also factor in possible asymmetric responses by banks influenced by size, capitalization, as well as ownership structure.

THE DETERMINANTS OF BANK CREDIT GROWTH AND CREDIT AGGREGATE BEHAVIOR DURING ALTERNATE BUSINESS CYCLES IN SOUTH AFRICA

Purpose: The purpose of this study was to Analyze of the Relationship between Business Cycles and Bank Credit Extension: Evidence from South Africa. The study sought establish the determinants of bank credit growth in South Africa and how the different credit aggregates behave during alternate business cyclesMethodology: This study adopted qualitative and quantitative research. The qualitative research involves structured interviews with influential or well informed people on the subject matter. The study is used to understand the key determinants of bank credit in South Africa and to appreciate how each of the credit aggregates behaves during alternate business cycles. The qualitative results are used to formulate questions of the structured survey questionnaire. The ANOVA and Pearman’s product correlation analysis techniques are used to assess relationship between variables.Results: Results revealed that, key determinants of commercial bank credit in South Africa as economic growth, collateral value, bank competition, money supply, deposit liabilities, capital requirements, bank lending rates and inflation. The quantitative results show that there is direct and positive relationship between bank lending behaviour and credit aggregates namely economic growth, collateral value, bank competition and money supply.Unique contribution to theory, practice and policy: It proposes practical policy prescriptions to address challenges currently facing South Africa. The other major contribution of this study is that it shall open new avenues for further research on determinants of bank credit growth in South Africa and how the different credit aggregates behave during alternate business cycles.

Can speed kill?

PurposeThis study aims to analyze bank lending behavior before and during the most recent financial crisis. Banks are more willing to grant loans during economic expansion. However, this behavior can result in reduced portfolio asset quality. The analysis tries to facilitate understanding of whether this relationship is always true. A second aim of the study is to highlight whether the impact of credit risk on bank lending behavior during a financial crisis is greater for banks that grew faster during the pre-crisis period than for other banks.Design/methodology/approachThe analysis is based on a sample of banks in Italy, an example of a country undergoing a credit crunch without a lending bubble burst. The methodology is based on a panel regression and author uses different models to test his hypothesis: an ordinary least squares, a fixed effect, a least absolute regression and a Generalized Method of Momentum (GMM). This allows to mitigate some of the endogeneity problems.FindingsThe essay shows that effectively, most of the banks that grew faster during a pre-crisis period show a higher growth of non-performing loans and a greater reduction in lending activity during a financial crisis. However, 34 per cent of banks that grew faster during a pre-crisis period have a low growth of non-performing loans in the subsequent years. Finally, the results suggest that credit risk negatively affects bank lending behavior, but a higher impact relative to fast banks with respect to other banks cannot be emphasized.Practical implicationsFindings have some policy implications. First, given the adverse effect of the increase of non-performing loans (NPLs) on the bank’s lending activity and on the broad economy in general, there is merit to strengthen supervision to prevent a further increase and accumulation of NPLs in the bank’s credit portfolio. In addition, the supervisors could require that banks take always high credit standard when extend credit, both during positive economic cycle and during period of contraction. The using of higher credit standard could be helpful in the reduction of the pro-cyclicality of bank’s lending behavior and credit risk. Furthermore, the fact that high level of NPLs continues to impact on the bank’s lending activity and that this activity is very important for the economic recovery underlines that banks should clean-up their credit portfolios as soon as possible.Originality/valueThis paper contributes to the literature in various ways. The study analyzes the cyclical effect of credit growth, i.e. banks increase their bank lending behavior during good times, which leads to an increase in bad loans and a high credit risk in their portfolio. These cyclical effects are not knowingly studied together, but the literature usually analyzes the single steps of the cycle. Second, studying listed and unlisted banks allows to have a more representative sample and to analyze better the real bank lending activity considering both commercial than cooperative banks.

Dissecting Foreign Bank Lending Behavior During the 2008–2009 Crisis

This paper analyzes the lending behavior of foreign‐owned banks during the recent global crisis. Using bank‐level panel data for 51 countries, the paper explores the role of affiliate and parent financial characteristics, host location, as well as the impact of parent geographic origin and reach on foreign banks’ credit growth. Overall, the analysis finds robust evidence that foreign banks curtailed the growth of credit relative to other banks, independent of the host region in which they operate. Banks from the United States reduced loan growth less than other parent banks. Neither the global nor regional reach of parent banks influenced the lending growth of foreign affiliates. Parent capitalization and not parent funding explained the behavior of foreign bank credit growth during the global crisis. However, funding did affect the lending behavior of domestic and foreign banks in host countries, with those relying more heavily on deposits suffering a smaller decline in bank lending. Although not the focus of the paper, we also find that government‐owned banks played a countercyclical role in all regions.

Determinants of Bank Lending in Nepal

Commercial banks constitute a major chunk of total assets in the banking system in Nepal and extension of credit is one of the major functions of banking institutions. If banks are not efficient in their lending behavior, it may not contribute to economic growth. On the other hand, their inefficient and imprudent banking practices may lead to riskier financial instability. The main objective of the study is to test and confirm the effectiveness of the determinants of commercial bank lending behavior in Nepal by using time series Ordinary Least Square regression approach for empirical analysis. The model involves Nepalese commercial banks' private sector credit (pvct) as dependent variable and other variables such as their volume of deposits (dep), interest rate (Ir), stipulated cash reserve requirements ratio (crr), their liquidity ratio (lr), inflation (inf), exchange rate (exr), and gross domestic product (gdp) as independent variables for the period; 1975 – 2014. From the regression analysis, it was found that Gross Domestic Product and liquidity ratio of banks have the greatest impacts on their lending behavior. Granger Causality Test shows the evidence of unidirectional casual relationship from GDP to private sector credit. The study implies that GDP is the barometer of the economy and commercial banks should pay their attention to the overall macro economic situation of the country, factors affecting the GDP in general and their liquidity ratio in particular while taking lending decision.

The Impact of the Regulation of Centrally Cleared Credit Risk Transfer and Capital Requirements on Banks' Lending Discipline

This article investigates the impact of central clearing in credit risk transfer markets on a loan-originating bank's lending behavior. Access to central clearing changes the bank's optimal loan risk hedging strategy so as to undermine lending discipline. The effect on lending discipline depends crucially on the regulatory design of central clearing in terms of capital requirements, disclosure standards, risk retention, and access to uncleared credit risk transfer. I also show that lending discipline is an important channel to assess the total impact of central clearing on systemic risk.

English

For the proponents of the “greasing the wheel” position, in the context of market imperfections, corruption helps in alleviating distortions in the credit market, facilitates access to bank credit and promotes the financing of the economy. The aim of this paper was to interrogate the impact of corruption on bank lending behavior in CEMAC countries, not only ranked among the most corrupt economies in the world by international institutions, but also confronted with problem of difficult access to banking services for most economic operators. To achieve this goal, an explanatory model of bank lending behavior in which corruption appears as an argument beside a set of control variables, was built. The model estimation on CEMAC countries’ data shows that corruption has a significant negative effect on commercial bank credit behavior. Given the importance of bank credit in financing development, such a finding is an additional argument for integrating governance considerations into any policy targeting the emergence in community countries. Key words: Corruption, bank, financial development, Africa.

Trade and Capital Openness: Impact on Bank Net Interest Margins, Lending and Risk-Taking Behavior

This paper is a contribution to ‘interest groups theory of financial development’ based debate that trade- and capital-openness are helpful for financial development. We extend this debate by examining the impact of trade- and capital-openness on net interest margins (rents), gross loan ratios (lending), and risk-taking behavior of incumbent financial institutions. Analyzing a sample of 287 key banks from 37 emerging countries, we find robust evidence that higher trade-openness cause a decrease in average bank net interest margins, an increase in average bank gross loan ratios and a decrease in average bank insolvency risk. We find limited support for the role of capital-openness however. For bank net interest margins, we find that higher capital-openness is effective in reducing average net interest margins of key banks only when considered jointly with trade-openness, but not independently. For bank gross loan ratios and risk-taking, we find that higher capital-openness causes a decrease in average bank gross loan ratios and an increase in average bank risk-taking in emerging economies. Together, our findings support that trade-openness is an effective tool for increasing banking sector development in emerging economies. However, emerging economies must be cautious while opening capital accounts because higher capital-openness although causes a decrease in rents of incumbent financial institutions but it increases overall fragility of key banks.

The Impact of Foreign Banks on Monetary Policy Transmission During the Global Financial Crisis of 2008–2009: Evidence from Korea

ABSTRACTThis article examines the impact of foreign banks on the monetary policy transmission mechanism in the Korean economy during the period from 2000 to 2012, with a specific focus on the lending behavior of banks with different types of ownership. Using bank-level panel data of the banking system in Korea, we present consistent evidence on the buffering impact that the foreign banks, especially foreign bank branches including US bank branches, on the effectiveness of the monetary policy transmission mechanism in Korea from the bank-lending channel perspective during the global financial crisis of 2008–2009.

Life Below Zero: Bank Lending Under Negative Policy Rates

This paper studies the transmission of negative monetary-policy rates via the lending behavior of banks. Unlike for positive rates, the transmission of negative rates depends on banks' funding structure. High-deposit banks take on more risk and lend less than low-deposit banks. Part of the risk taking comes in the form of new syndicated loans to risky firms without such loans previously, and it is limited to poorly-capitalized banks. Safe borrowers switch from high-deposit to low-deposit banks. The new risky borrowers appear financially constrained, and use the new funding to invest. For identification, we rely on a difference-in-differences approach. Banks with different reliance on deposit funding experience a different pass-through of negative policy rates. To isolate borrowers from interest-rate changes, we use lenders located in a different currency zone. A placebo at the time when policy rates fall -- but are still positive -- shows no effect. The results point to distributional consequences of negative policy rates with potential risks to financial stability.

A Cluster Analysis of Bank Lending Behavior by Using Self-Organizing Map: The Case of Japan

This paper provides a cluster analysis of the bank lending behavior in Japan from 1977 to 2002, in which the bubble economy occurred. The self-organizing map is used for the clustering. This clustering method is a type of artificial neural network and enables us to visualize the similarities among the high-dimensional data on bank lending. A result of clustering indicates that this time period is classified into two periods: before and after 1992. Moreover, we successfully extract the characteristics of bank lending behavior on 8 borrower sectors from another clustering result.

Loan Loss Provisions and Bank Lending Behavior: Do Information Sharing and Borrowerss Legal Rights Matter?

We examine the roles of information sharing and borrower’s legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and, hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, not private credit bureaus managed by the private sector, might substitute for the role of dynamic provisioning systems in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights for borrowers temper the procyclical effect of non-discretionary provisions. However, these findings hold only for small banks. This suggests that the implementation of dynamic provisioning systems to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks.