Ghosh, Saibal (2010): Credit Growth, Bank Soundness and Financial Fragility: Evidence from Indian Banking Sector. Published in: South Asia Economic Journal , Vol. 11, (March 2010): pp. 69-98.
Download (152kB) | Preview
Using data on Indian banks for 1996-2008, the paper examines the interconnect among credit growth, bank soundness and financial fragility. The analysis appears to indicate that higher credit growth amplifies bank fragility. Besides, the results point to the fact that sounder banks increase loan supply. Coming to bank ownership, the evidence testifies that credit growth has been rapid in state-owned and de novo private banks. In terms of policy implications, the analysis appears to suggest the need for giving priority to risk-based supervision as a way to contain the potential risks associated with rapid credit growth
|Item Type:||MPRA Paper|
|Original Title:||Credit Growth, Bank Soundness and Financial Fragility: Evidence from Indian Banking Sector|
|Keywords:||Banking; Credit growth; Z-score; Non-performing loans; India|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages|
|Depositing User:||Saibal Ghosh|
|Date Deposited:||30. Aug 2010 19:24|
|Last Modified:||11. Feb 2013 20:34|
Ahmad, R., M. Ariff and M. J. Skully (2008). The determinants of bank capital ratios in a developing economy. Asia Pacific Financial Markets 15, 255-72.
Altman, E. and A.Saunders (1999): Credit risk measurement: developments over the last 29 years, Journal of Banking and Finance 21, 1721-42.
Ayuso, J., D.Perez and J.Saurina (2004). Are capital buffers pro-cyclical? evidence from Spanish panel data. Journal of Financial Intermediation 13, 249-64.
Bank of England (2009). The role of macroprudential policy. Bank of England: UK.
Bank for International Settlements (2010) Annual Report 2010. BIS: Basel.
Bank for International Settlements (2009) Capital Flows and Emerging Economies (Report of the Committee on the Global Financial System (Chairman: Dr. Rakesh Mohan). CGFS Publication No. 33. BIS: Basel.
Barajas, A., and R. Steiner (2002). Credit stagnation in Latin America. IMF Working Paper No. 53. IMF: Washington DC.
Barajas, A., R. Chami and T.F. Cosimano (2005). Did the Basel accord cause a credit slowdown in Latin America? IMF Working Paper No. 38. IMF: Washington DC.
Beck, T., and A. Demirguc Kunt (2009). Financial institutions and markets across countries and over time – Data and Analysis. World Bank Policy Research Working Paper No. 4943. World Bank: Washington DC.
Berger, A. N., & Humphrey, D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research 98, 175–212.
Berger, A.N. and G.Udell (2004). The institutional memory hypothesis and the procyclicality of bank lending behaviour. Journal of Financial Intermediation, 13, 458-95.
Berger, A.N., and R. DeYoung (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance 21, 849-70.
Berger, A.N., G. Clarke, R. Cull, L. Klapper and G. Udell (2005). Corporate governance and bank performance: A joint analysis of the static, selection and dynamic effects of domestic, foreign and state ownership. Journal of Banking and Finance 29, 2179-2221.
Borio, C., C. Furfine and P. Lowe (2001). Procyclicality of the financial system and financial stability: Issues and policy options. In Marrying the Macro- and Micro-prudential Dimensions of Financial Stability. BIS Policy Paper No. 1. BIS: Basel.
Boubakri, N., J. Cosset, K. Fischer and O. Guedhami (2005). Privatization and bank performance in developing countries. Journal of Banking and Finance 29, 2015-41.
Breuer, L., G. Gasha and J. Peschiera (2009). Credit growth: Anatomy and policy responses. In Peru: Selected Issues. IMF: Washington DC.
Chairlone, S., and S. Ghosh (2009). India. In P. Bongini, S.Chairlone, G.Ferri (Eds.) Emerging Banking Systems. Palgrave McMillan, UK.
Contessi, S., and J. Francis (2009). US commercial bank lending through 2008 Q4: New evidence from gross capital flows. Working Paper No. 11. Federal Reserve Bank of St. Louis: USA.
Cottarelli, C., G. Dell’Ariccia and L. Vladkova-Hollar (2005). Early birds, late risers and sleeping beauties: Bank credit growth to private sector in Central and Eastern Europe and in the Balkans. Journal of Banking and Finance 29, 83-104.
Das, A. and S. Ghosh (2003). The relationship between risk and capital: Evidence from Indian public sector banks. RBI Occasional Papers (Summer), 1-21.
Das, A. and S. Ghosh (2006). Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics 15, 193-221.
Das, A., and S. Ghosh (2007). Determinants of credit risk in Indian state-owned banks: An empirical investigation. Economic Issues 12, 27-46.
Das, A., and S. Ghosh (2009). Financial deregulation and profit efficiency: A nonparametric analysis of Indian banks. Journal of Economics and Business (forthcoming).
De Haas, R. and I. Lelyveld (2006). Foreign banks and credit stability in Central and Eastern Europe: A panel data analysis. Journal of Banking and Finance 30, 1927-52.
De Nicolo, G. (2000). Size, charter value and risk in banking: An international perspective. IFC Discussion Paper No.689. Board of Governors of the Federal Reserve: Washington DC.
De Nicolo, G., (2007). The implications of economic integration for financial stability: An European perspective. In P. Nobel and M. Gets (Eds.) Law and Economics of Risk in Finance. Schultess: Zurich.
Dell’Ariccia, G. (2001). Asymmetric information and the structure of the banking industry. European Economic Review 45, 1957-80.
Dell’Ariccia, G. and R.Marquez (2006). Lending booms and lending standards. Journal of Finance 61, 2511-46.
Dell’Ariccia, G., E. Detragiache and R.G.Rajan (2008). The real effect of banking crisis. Journal of Financial Intermediation 17, 89-112..
Demirguc Kunt, A. and R. Levine (2001). Bank-based versus market-based financial systems: Cross-country comparisons. In A. Demirguc Kunt and R. Levine (Eds.) Financial Structure and Economic Growth: A Cross-country Comparison of Banks, Markets and Development. Cambridge MA: MIT Press.
Demsetz, R., and P. Strahan (997). Diversification, firm and risk at bank holding companies. Journal of Money, Credit and Banking 29, 300-13.
Egert, B., P. Backe and T. Zumer (2006). Credit growth in Central and Eastern Europe: New (Over)Shooting Stars? Unpublished (Vienna: Austrian National Bank).
Fabrizio, C., and R. Isabelle (2008). Finance and growth: When does credit really matter? CEPR Discussion Paper No. 6885. CEPR: Washington DC.
Gabriel, J.Z., V. Salas and J. Saurina (2006). Determinants of collateral. Journal of Financial Economics 81, 255-81.
Gambacorta, L. and P.E.Mistrulli (2004). Does bank capital affect lending behavior? Journal of Financial Intermediation, 13, 436-57.
Government of India (1991). Report of the Committee on the Financial System (Chairman: Shri M. Narasimham). Government of India: New Delhi.
Government of India (1998). Report of the Committee on the Banking Sector (Chairman: Shri M. Narasimham). Government of India: New Delhi.
Gropp, R., C. K. Sorensen and J-D. Lichtenberger (2007). The dynamics of bank spread and financial structure. Working Paper No. 714. ECB: Frankfurt.
Hao, J., Hunter, W., & Yang, W. (1999). Deregulation and efficiency: The case of private Korean banks. Federal Reserve Bank of Chicago. Working Paper, 27.
Hilbers, P., I. Otker, C. Pazarbasioglu and G. Johnsen (2005). Assessing and managing rapid credit growth and the role of supervisory and prudential policies. IMF Working Paper No. 151. IMF: Washington DC.
Holmstrom, B and J.Tirole (2000): Liquidity and risk management. Journal of Money, Credit and Banking 32, 295-319.
Honohan, P (1997). Banking system failures in developing and transition countries: Diagnosis and predictions. BIS Working Paper No.39, BIS: Basel.
Iossifov, P., M. Cihak and A. Shanghavi (2008). Interest rate elasticity of residential house prices. IMF Working Paper No. 247. IMF: Washington DC.
Jimenez, G and J. Saurina (2006). Credit cycles, credit risk and prudential regulation. International Journal of Central Banking 2, 65-98.
Kishan, R., and T.P.Opiela (2000). Bank size, bank capital and the bank lending channel. Journal of Money, Credit and Banking, 32, 121-41.
Kumbhakar, S. C., and Sarkar, S. (2003). Deregulation, ownership and productivity growth in the banking industry: Evidence from India. Journal of Money, Credit, and Banking 35, 403–414.
Kwan, S and R.A.Eisenbis (1997). Bank Risk, capitalization and operating efficiency. Journal of Financial Services Research 12, 117-31.
Laeven, L. and R. Levine (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics 85, 331-67.
Laeven, L., and R. Levine (2009). Bank governance, regulation and bank risk-taking. Journal of Financial Economics (forthcoming).
Lindquist, K.G. (2004). Banks’ buffer capital: How important is risk? Journal of International Money and Finance 23: 493-513.
Maechler, A., M. Ong and L. Li (2009). Foreign banks in the CESE countries: In for a penny, in for a pound. IMF Working Paper 54. IMF: Washington DC.
Maechler, A., S. Mitra and D. Worrell (2007). Decomposing financial risks and vulnerabilities in Eastern Europe. IMF Working Paper No. 248. IMF: Washington.
Maudos, J., & Pastor, J. M. (2001). Cost and profit efficiency in banking: An international comparison of Europe, Japan and USA. Applied Economics Letters 8, 383–87.
Mercieca, S., K.Schaeck and S.Wolfe (2007). Small European banks: Benefits from diversification? Journal of Banking and Finance 31, 1975-98.
Nag, A., and A. Das (2002). Credit growth and response to capital requirements. Economic and Political Weekly 42, 3361-68.
Nier, E., and L. Zicchino (2005). Bank weakness and bank loan supply. Bank of England Financial Stability Review (December), 85-93.
Pandit, B.L., A. Mittal, M. Roy and S. Ghosh (2006). Transmission of monetary policy and the bank lending channel: Analysis and evidence for India. DRG Study No. 25. RBI: Mumbai.
Prasad, A. and S. Ghosh (2003). Credit risk, leverage and operating efficiency: Evidence from Indian banking industry. International Journal of Development Issues 2, 45-70.
Rajan, R.G. (1994): Why banks credit policies fluctuate? A theory and some evidence. Quarterly Journal of Economics 109, 399-441.
Reddy, Y,.V. (2002). Public sector banks and the governance challenge –The Indian experience. Address delivered at the World Bank, IMF and Brookings Institution Conference on Financial Sector Governance. Available at <www. bis.org>
Reserve Bank of India (2008). Handbook of Statistics on the Indian Economy. RBI: Mumbai.
Reserve Bank of India. Report on Trend and Progress of Banking in India (various years). RBI: Mumbai.
Reserve Bank of India. Statistical Tables relating to Banks in India (various years). RBI: Mumbai.
Rime, B., (2001). Capital requirements and bank behavior: empirical evidence for Switzerland. Journal of Banking and Finance 25, 789-805.
Sab, R. and S.C. Smith (2002). Human capital convergence: A joint estimation approach. IMF Staff Paper 49, 200-11.
Santomero, A.M. (1997). Commercial bank risk management: An analysis of the process, Journal of Financial Services Research 2/3, 83-115.
Shrieves, R and D.Dahl (1992). The relationship between risk and capital in commercial banks. Journal of Banking and Finance, 16, 439-57.
Stolz, S. (2008). Bank capital and risk taking. Springer Verlag: New York.
Tamirisa, N. and M. Cihak (2006). Household credit in the Czech Republic: Macro and microprudential analysis, cross country experiences and implications for financial sector policy and surveillance. IMF: Washington DC.
Tieman, A., M. Khamis, F. Haas and D. Schoenmaker (2007). Financial integration in the Nordic-Baltic region: Challenges for financial policies (Edited volume). IMF: Washington DC.
Van Roy, P. (2008). Capital requirements and bank behavior in the early 1990s: Cross country evidence. International Journal of Central Banking 4, 29-60.
Williamson, O. (1963). Managerial discretion and business behavior. American Economic Review 53, 1032-57.