The Impact of Bank Herding on Systemic Risk

Abstract

We find that the level of bank herding in real estate loans during boom period is substantially higher than the level of bank herding in commercial and industrial loans or consumer loans. More importantly, we find that bank herding significantly increases systemic risk. In particular, herding in real estate loans by big banks contribute more to systemic risk. We find bank herding interacts with boom period to provide a stronger predictive power of systemic risk to next period beyond what is predicted by bank herding and boom period individually. We attribute these results to evidence of too-many-and-big-to-fail.

Keywords: Herding, Systemic risk, Financial Stability, Lending Boom, Banking

JEL Classification: G01, G18, G21, G28, G32