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

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  • Hao Fang
  • Yen‐Hsien Lee
  • Chung‐Hua Shen
  • Chien‐Ping Chung

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.

Suggested Citation

  • Hao Fang & Yen‐Hsien Lee & Chung‐Hua Shen & Chien‐Ping Chung, 2019. "Motivations for Loan Herding by Chinese Banks and Its Impact on Bank Performance," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(4), pages 29-52, July.
    • Handle: RePEc:bla:chinae:v:27:y:2019:i:4:p:29-52
    DOI: 10.1111/cwe.12285
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    Cited by:

    1. Fang, Hao & Lu, Yang-Cheng & Shieh, Joseph.C.P. & Lee, Yen-Hsien, 2021. "The existence and motivations of irrational loan herding and its impact on bank performance when considering different market periods," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 420-443.

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