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Loan growth and bank risk: new evidence

Abstract

This study provides new evidence on the relationship between abnormal loan growth and banks’ risk-taking behavior using data from a rich panel of Colombian financial institutions. We show that abnormal credit growth during a prolonged period leads to an increase in banks’ riskiness, accompanied by a reduction in solvency and an increase in the ratio of nonperforming loans to total loans. We also show that abnormal credit growth played a fundamental role in the bank-failure process during the late 1990s financial crisis in Colombia. Our results have important implications for financial regulation and macro-prudential policy.

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Notes

  1. 1.

    We use the median rather than the mean of the growth rate of all institutions at a given point in time because our data are highly dispersed and for every given point we find several extreme values.

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Acknowledgments

We gratefully acknowledge comments received from Fernando Tenjo, Leonardo Villar, Juan M. Ramírez, Cristina Ferández, Luis A. Zuleta, Luis Melo, Hernán Rincón, Jair Ojeda, and participants at the Banco de la Republica’s Economics Workshop and Fedesarrollo’s workshop. We are especially grateful to Professor Markus Schmid and anonymous referees for superb comments and suggestions made to a previous version of this article.

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Correspondence to José E. Gómez-González.

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The findings, recommendations, interpretations, and conclusions expressed in this paper are those of the authors and do not necessarily reflect the view of the Banco de la República or its Board of Directors.

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Amador, J.S., Gómez-González, J.E. & Pabón, A.M. Loan growth and bank risk: new evidence. Financ Mark Portf Manag 27, 365–379 (2013). https://doi.org/10.1007/s11408-013-0217-6

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Keywords

  • Abnormal loan growth
  • Hazard duration models
  • FGLS estimation
  • Emerging market economies

JEL Classification

  • G20
  • G21