Loan growth and bank risk: new evidence |
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Authors: | Juan Sebastián Amador José E Gómez-González Andrés Murcia Pabón |
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Institution: | 1. Department of Inflation and Macroeconomic Programming, Central Bank of Colombia, Bogotá, Colombia 2. Research Department, Central Bank of Colombia, Bogotá, Colombia 3. Monetary and Reserve Affairs Office, Central Bank of Colombia, Bogotá, Colombia
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Abstract: | This study provides new evidence on the relationship between abnormal loan growth and banks’ risk-taking behavior using data from a rich panel of Colombian financial institutions. We show that abnormal credit growth during a prolonged period leads to an increase in banks’ riskiness, accompanied by a reduction in solvency and an increase in the ratio of nonperforming loans to total loans. We also show that abnormal credit growth played a fundamental role in the bank-failure process during the late 1990s financial crisis in Colombia. Our results have important implications for financial regulation and macro-prudential policy. |
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