Loan Growth and Riskiness of Banks

Foos, Daniel ; Norden, Lars ; Weber, Martin

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URN: urn:nbn:de:bsz:180-madoc-17799
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: Working Papers
Volume: 142
Place of publication: Mannheim
ISSN: 1869-0483 , 1869-0491
Edition: Version December 1, 2007
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: G21 G20 ,
Subject headings (SWD): Kreditwesen , Wertberichtigung , Bankenliquidität
Keywords (English): Bank lending , Loan losses , Bank profitability , Bank solvency
Abstract: We investigate whether loan growth affects the riskiness of banks in 14 major western countries under "regular conditions". Using Bankscope data from more than 10,000 individual banks during 1997-2005, we test three hypotheses on the relation between past loan growth and loan losses, bank profitability, and bank solvency. Our empirical evidence supports the view that loan growth leads to a peak in loan loss provisions three years later, to a decrease in relative interest income, and to lower capital ratios. Further analyses reveal that loan growth also has a negative impact on risk-adjusted interest income. These results suggest that loan growth represents an important driver of bank risk.

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