Herding behaviour in the Australian loan market and its impact on bank loan quality
Vuong Thao Tran,
Hoa Nguyen and
Chien Ting Lin
Accounting and Finance, 2017, vol. 57, issue 4, 1149-1176
We examine the effect of herding behaviour on the credit quality of bank loans in Australia. We find that bank herding varies with different types of loans. It tends to be more prevalent in ownerâ€ occupied housing loans and credit cards than other types of loans. During the global financial crisis period, herding in ownerâ€ occupied housing loans was most pronounced due to the flightâ€ toâ€ quality phenomenon in the housing sector. Furthermore, we find that the big four banks tend to herd more than smaller and regional banks. Bank herding behaviour is countercyclical, as it is negatively related to real GDP growth and the cost of funding but is positively related to market risk. Regulatory capital requirements may also encourage herding as banks are required to hold less riskâ€ weighted capital for residential loans. Most importantly, bank herding is related to higher impaired assets and therefore lower loan quality. Our findings may have implications for policymakers and bank regulators.
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