Peer effects of bank loan portfolio on systemic insolvency risk: evidence from China

ABSTRACT

By empirically analysing the panel data of Chinese commercial banks, we find that regional city commercial banks significantly mimic their peers in multiple lending parts of loan portfolio, while large nationwide commercial banks behave oppositely to their peers. In addition, by using a Euclidean distance way to measure bank interconnectedness, we reveal that the overlap of loan portfolios between banks is significantly correlated to the similarity of insolvency risk between them. It implies that peer effects of bank loan portfolio are likely to be sources of systemic insolvency risk in the bank system. These results help deepen the understanding of peer effects of bank activities, and provide insights into the correlation between peer effects and systemic risk in banks.

KEYWORDS:

• Peer effects
• herd behaviour
• bank loan portfolio
• systemic risk
• bank insolvency risk

JEL CLASSIFICATION:

• G21

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We sum shares of corporate business loans to real estate and construction sectors and that of individual housing loans. It is because that they are usually highly correlated, given that the Real estate sector plays an important role in China economy development.

² City commercial banks are generally controlled by local governments and mainly engage in bank services in the local province. Thus, given that city commercial banks in the same province face with the same loan market, it is reasonable to believe that they are very likely to be influenced by the banks in the same province, yet are less likely to be affected by city commercial banks in other provinces. Accordingly, we only treat Big six banks and shareholding commercial banks, and those city commercial banks in the same province as the peers of city commercial banks.

³ We have also run the test regressions regarding to Big six banks and shareholding commercial banks. The results are similar to those of subgroup regression.

⁴ Though peer effects of two lending parts (i.e., Real estate related loan and Infrastructure loan) are not verified after rigorous robustness tests, we still use the six lending parts to frame the Euclidean distance so as to remain information of bank loan portfolio.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China [Nos.71701193, 71804040, and 71804174], and Philosophy & Social Science Project of Anhui Province [No. AHSKQ2019D026].