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The relationship between implicit moral hazard, corporate governance, and bank lending behavior

Author

Listed:
  • Chiao-Ming Li

    (Soochow University)

  • Hsu Chi Wang

    (Soochow University)

  • Chun-Hsin Chou

    (National Taiwan University)

  • Joe-Ming Lee

    (Fo Guang University)

Abstract

Environmental, social, and governance (ESG) development has indeed changed the original economic operation status through diversified methods. The banking industry, especially under the guidance of ESG, reminds the banking industry that it should focus on regulatory conditions such as lending objects with ESG operating characteristics. In terms of corporate governance, the banking industry needs to adopt high self-management standards for business development. This paper uses the panel threshold model to measure the regional moral hazard of 30 firms in the Taiwan bank industry from 2007 to 2018. The research shows that banks with high regional loan concentration ratios have evidence of moral hazard and a significant asymmetric effect in the regional loan concentration ratio in the bank industry. Based on this, the bank’s high regional (NPL ratio) is used to measure the level of the bank’s credit risk and quality of outstanding loans, which requires strengthening loan quality, the optimum concentration of loan weight, promoting the establishment of the effectiveness of the ownership structure and enhancing the development of management ability. Due to Taiwan’s banking industry’s overly competitive business environment, loan concentration and moral hazard lending practices have emerged. There is an apparent correlation between the development of the banking industry and an extremely competitive business environment. Therefore, how to have healthy competition in the banking industry instead of vicious competition is worth learning from other countries. This paper argues that creating a competitive banking environment is crucial. To target loan recipients, the banking industry should leverage its business expertise, integrity, and business ethos in line with international trends, such as ESG development trends. Regarding corporate governance, banks should be able to use equity structures, compensation system management, and internal management measures to establish more competitive professional banks.

Suggested Citation

  • Chiao-Ming Li & Hsu Chi Wang & Chun-Hsin Chou & Joe-Ming Lee, 2025. "The relationship between implicit moral hazard, corporate governance, and bank lending behavior," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 28(1), pages 189-207, March.
    • Handle: RePEc:bbl:journl:v:28:y:2025:i:1:p:189-207
    DOI: 10.15240/tul/001/2025-1-012
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    References listed on IDEAS

    as
    1. Uchida, Hirofumi & Nakagawa, Ryuichi, 2007. "Herd behavior in the Japanese loan market: Evidence from bank panel data," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 555-583, October.
    2. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    3. Alex Adegboye & Stephen Ojeka & Kofo Adegboye & David McMillan, 2020. "Corporate governance structure, Bank externalities and sensitivity of non-performing loans in Nigeria," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1816611-181, January.
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    More about this item

    Keywords

    Moral hazard; loan concentration ratio; panel threshold model;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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