Abnormal Loan Growth And Riskiness Of Banks

Riskiness of banks is the possibility of economic losses, in other words, it is the possibility of assets losses and income losses which has happened in the business activities. Bank’s risk is related to the stability of the financial system and the operation of social economic. The credit business is the bank’s traditional business; loan growth has brought huge profits to the bank, but the riskiness of bank also increase accompanied by loan growth. We investigate whether loan growth affects the riskiness of individual banks. Abnormal loan growth is defined as the difference between an individual bank’s loan growth and the median loan growth of banks from the same year. Non-performing loans is the main manifestations of credit risk. The non-performing loans is that the borrowers can’t repay the principal and interest, or there are signs that the borrower can not repay principal and interest loans in accordance with the pre-agreed period of time and the interest rate. In Chain, the dynamic part of the funds that the bank used to resist risk is composed of net interest margin. The static portion of funds is the owner’s equity. In the beginning of the period, the bank has ownership interest. Until the end of the period, banks gradually get the net interest margin, and as a risk prevention funds.We investigate whether loan growth affects the riskiness of individual banks. Therefore, I measured the risk of the bank from the three aspects which are NPL ratio, net interest margin and shareholders’equity to total assets ratio. First, I introduced the related concepts about loan growth and bank risk, NPL (non-performing loan), NIM (Net Interest Margin), EQASSETS (Equity-to-total assets) and the situation of our country. Next, based on previous literature, I proposed that the three assumptions discussed in this paper. These hypotheses are:abnormal loan growth will cause an increase in bad loans; abnormal loan growth has led to banks declining margins; negative correlation between the abnormal loan growth and bank solvency. I analyze yearly balance sheet and income statement data from Bank scope on77individual banks from during the period1999-2009, including578observations. Three regression equations were established based on three assumptions. They are followed by the intertemporal relations between abnormal loan growth and non-performing loan rate, abnormal loan growth and net interest margin regression analysis, abnormal growth of loans to equity ration.. I used OLS regression to return to the three equations. It is noteworthy that, in the regression equation of the abnormal loan growth and non-performing loans; I get the correlation coefficient of each variable with OLS regression, then using the dynamic panel regression method, I obtained a more significant regression results. In the part of abnormal loan growth and net interest margin regression analysis, I analyzed the regression again excluding the extreme value of abnormal loan growth.According results of the three regression equations, I found evidences which support the three assumptions.There is a positive relationship between abnormal loan growth and the rate of non-performing loan. In addition, I found that the larger the bank, the smaller the loan losses; greater risk of loan losses faced by small and medium banks. They need more serious qualification examination to the lenders. There is a negative correlation coefficient between abnormal loan growth and net interest margin. Summarized empirical results, 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.Based on the results of empirical analysis, I propose countermeasures both from banks and government. I think the banks should strengthen awareness of the risks on loan growth, improve the quality and structure of loans. In order to promote development and stability of banks, China’s banks should further improve the internal assessment mechanism. The government needs to promote the development of capital markets and strengthen the supervision of bank risk indicators.