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

Thomas Kick, Thilo Pausch and Benedikt Ruprecht

No 32/2015, Discussion Papers from Deutsche Bundesbank

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.

Keywords: Excessive credit growth; Winner's curse; Loan-to-GDP gap; Micro-prudential regulation; Identifying weak banks (search for similar items in EconPapers)
JEL-codes: C23 G21 G32 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/119886/1/835722937.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:322015

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().