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The winner's curse: Evidence on the danger of aggressive credit growth in banking

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  • Kick, Thomas
  • Pausch, Thilo
  • Ruprecht, Benedikt

Abstract

Excessive credit creation by banks was at the root of the recent financial crisis. Nevertheless, micro-prudential regulation lacks a clear methodology to identify these banks. Combining arguments from banking and auction theory, we show that overoptimism causes excessive lending, subsequently yielding abnormal loan write-offs. We propose a new measure of excessive credit growth known from macroeconomics to identify credit booms and test our model for German bank and bankportfolio level data. Unlike traditional measures of (excessive) loan growth, our new measure identifies banks that are affected by abnormal loan write-offs, need capital support, or default in subsequent years.

Suggested Citation

  • Kick, Thomas & Pausch, Thilo & Ruprecht, Benedikt, 2015. "The winner's curse: Evidence on the danger of aggressive credit growth in banking," Discussion Papers 32/2015, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:322015
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    References listed on IDEAS

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    More about this item

    Keywords

    Excessive credit growth; Winner's curse; Loan-to-GDP gap; Micro-prudential regulation; Identifying weak banks;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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