Study On The Fallacy Of Composition Of Commercial Banks’ Loan Based On The Industrial Excess Capacity

Excess capacity will bring risk to the bank loans. In the National BankSupervision Work Conference in2014, the China Banking Regulatory Commissionproposed that it is necessary to control the risk brought by excess capacity. Relativeresearch pointed out that,“wave phenomenon” in the firms’ investments is the mainreason of excess capacity. The essence of “wave phenomenon” is a problem ofoverinvestment of firms which is caused by incomplete information, and it is a fallacyof composition on investment. There exists the fallacy of composition in the financialsystem. If it becomes a common practice of all banks, a prudential action of a singlebank will threaten the stabilization of the financial system. Therefore, studying theexistence of the fallacy of composition of commercial banks in the form anddevelopment of excess capacity is of great significance to prevent excess capacity andthe resulting credit risk.This paper firstly defines the fallacy of composition of commercial banks’ loanby historical induction, puts forward that excess lending under incompleteinformation is the fallacy of composition of commercial banks’ loan. Then, we use theDEA-Tobit two step method to analyze the relationship between overcapacity andloan. First, we use DEA method to calculate the capacity utilization of China’s28manufacturing industry. The calculation results shows that there exist obviousovercapacity phenomenon in metal smelting and rolling industry, non-metallicmineral products industry, chemical materials and chemical products manufacturing,paper products industry and the chemical fiber manufacturing industry. The Tobitregression analysis on the capacity utilization and loans shows that capacityutilization rate has inverted U relationship with loans, which means that there existthe fallacy of composition of commercial banks’ loan in the form and development ofexcess capacity.To seek the reason of the fallacy of composition of commercial banks’ loan, weuse a sequential game to analyze the banks’ lending behavior, the analysis showedthat incomplete information is the major cause of the fallacy of composition ofcommercial banks’ loan, and empirical analysis also supported this conclusion.The essence of the fallacy of composition of commercial banks’ loan is marketincomplete caused by incomplete information. Therefore, taking the following measures, which includes improving the information disclosure mechanism ofenterprise and bank, exploiting the advantages of total information and the ability toguide market expectations of government, requiring extra capital under the secondpillar capital requirements to industrial loan, conducting the industry credit risk’smacro-economic stress on account of the industry characteristics, strengthening thecommunication and coordination between financial supervisors and macro-controldepartments, can contribute to relieve the fallacy of composition of commercial banks’loan and the resulting excess capacity.