Motivations for Loan Herding by Chinese Banks and its Impact on Bank Performance

24 Pages Posted: 7 May 2020

See all articles by Hao Fang

Hao Fang

Hwa Hsia Institute of Technology - Department of Assets and Property Management

Yen-Hsien Lee

Chung Yuan Christian University

Chung-Hua Shen

National Taiwan University - Department of Finance

Chien‐Ping Chung

National Taiwan University of Science and Technology

Date Written: July–August 2019

Abstract

This study uses a dynamic herding model that considers intertemporal and cross‐sectional correlation to confirm that loan herding occurs among joint‐stock commercial banks (JSCBs) and city commercial banks (CCBs). We clarify the motivations for bank loan herding. We find that loan herding by both JSCBs and CCBs results more from following the behavior of other same‐type banks than different‐type banks because of characteristic herding or reputational concerns. Loan herding by JSCBs is motivated by investigative herding, whereas loan herding by CCBs results from informational cascades. Moreover, loan herding has a significantly harmful impact on the operating performance of CCBs but not JSCBs, which may be explained by the irrational behavior of CCBs. Our results will help Chinese bank supervisors develop appropriate policies for handling loan herding.

Keywords: financial crisis, irrational herding, loan herding

JEL Classification: G2, G4

Suggested Citation

Fang, Hao and Lee, Yen-Hsien and Shen, Chung-Hua and Chung, Chien‐Ping, Motivations for Loan Herding by Chinese Banks and its Impact on Bank Performance (July–August 2019). China & World Economy, Vol. 27, Issue 4, pp. 29-52, 2019, Available at SSRN: https://ssrn.com/abstract=3594694 or http://dx.doi.org/10.1111/cwe.12285

Hao Fang (Contact Author)

Hwa Hsia Institute of Technology - Department of Assets and Property Management ( email )

Zhonghe, Taipei County
Taiwan

Yen-Hsien Lee

Chung Yuan Christian University ( email )

22 Pu-Jen, Pu-chung Li
Chung-Li, 32023
Taiwan

Chung-Hua Shen

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Chien‐Ping Chung

National Taiwan University of Science and Technology ( email )

Keelung Road
Sec 43
Taipei
Taiwan

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