Loan Growth and Riskiness of Banks

38 Pages Posted: 4 Dec 2007 Last revised: 31 Jan 2012

See all articles by Daniel Foos

Daniel Foos

Deutsche Bundesbank

Martin Weber

University of Mannheim - Department of Banking and Finance

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Date Written: 2009

Abstract

We investigate whether loan growth affects the riskiness of individual banks in 16 major countries. Using Bankscope data from more than 16,000 individual banks during 1997-2007, we test three hypotheses on the relation between abnormal loan growth and asset risk, bank profitability, and bank solvency. We find that loan growth leads to an increase in loan loss provisions during the subsequent three years, to a decrease in relative interest income, and to lower capital ratios. Further analyses show that loan growth also has a negative impact on the risk-adjusted interest income. These results suggest that loan growth represents an important driver of the riskiness of banks.

Keywords: Bank lending, Credit risk, Loan losses, Bank profitability, Bank solvency

JEL Classification: G20, G21

Suggested Citation

Foos, Daniel and Weber, Martin and Norden, Lars, Loan Growth and Riskiness of Banks (2009). Journal of Banking and Finance, Vol. 34, pp. 2929-2940, 2009. Available at SSRN: https://ssrn.com/abstract=1045001

Daniel Foos (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

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