A study on bank lending behavior, do business cycle and government ownership affect

A Study on Bank Lending Behavior: Do Business Cycle and Government Ownership Affect? Le Van Lam Tran Phuong Thao Than Thi Thu Thuy University of Economics Ho Chi Minh City, Vietnam Abstract This study investigates the bank lending behavior in Vietnam by examining the role of business cycle as well as government ownership over the period 2010-2016 The empirical results support for the procyclical behavior of banking lending behaviour suggesting that banks expand theirs loan in booming period of economy In addition, state-owned banks are less sensitivity to the change of business cycle than private banks in a booming period This study sheds further light on the essential role of government-owned bank over the business cycle in the process of financial resource allocation for economic developments in an emerging country context Keywords: business cycle, bank lending behavior, government ownership, Vietnam Introduction Bank lending is an engine of growth in many countries An expansion of bank lending may enhance the growth of an economy while a decrease of bank lending may hamper the economic growth The literature on bank lending is substantial in prior studies including Lin and Zhang (2009); Williams (2012); Mendes and Rebelo (2003) who mainly focus on determinants of the behavior of bank lending Among aformentioned studies on bank lending, an interest on bank ownership is taken into account by many researchers including Lin and Zhang (2009), Micco and Panizza (2006), Behr et al (2013), Krainer (2014), Thakor (1996) and De Haas and Van Lelyveld (2010) who demonstrate great impact of bank onwership on bank lending behavior, especially in emerging contexts as their loans are mainly for serving the growth of the economy under the government direction Micco et al (2007) find that the lending of state-owned banks is less responsive to macroeconomic shocks than the lending of private banks This suggests that state-owned banks could play a useful role in the transmission of monetary policy Behr et al (2013) observed that in the Germany, bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which differ between privately owned and state-owned banks, suggesting that the ownership of banks may have an impact on the lending behavior of banks Sapienza (2004) observe that state-owned banks charge lower interest rates than privately owned banks They also observe that the lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank Business cycle is known as a key driver affecting bank performance including bank lending since they can influence the profitability and stability of banks Some common business cycle proxies are taken into account in prior studies such as gross domestic production and interest rate (Lin and Zhang, 2009, Behr et al., 2013)_ENREF_3 Aydemir and Guloglu (2017) conduct an investigation for the period 2002-2013 in Turkey and point out that business cycle affects not only bank spreads but also the relation between credit risk, liquidity risk and bank spreads Bernanke and Gertler (1989) and Bernanke et al (1999) provide evidence that the adverse influence of aggregate shocks can be amplified by external finance premium Micco and Panizza 285 (2006) examine impacts of GDP growth on bank credit growth and find evidence of less procyclical for state banks over the period 1995 – 2002 In the Vietnamese banking context, a wide range of studies were taken; however, almost studies consider bank performance, bank competition or bank efficiency (Malesky and Taussig, 2009, O'Connor, 2000, Nguyen et al., 2016b, Minh et al., 2013, Andrievskaya and Semenova, 2016) Additionally, despite several studies examining the effects of ownership and business cycle on bank lending in developed countries, their findings have no consensus Moreover, none of them have examined these effects in the Vietnamese banking industry This gives strong motivation to test whether state ownership of banks and business cycle are correlated with bank-lending behavior in the Vietnamese banking system In light of the research motivation and literature gap, this study examines the effect of government ownership and business cycle on the bank lending behavior of banks in Vietnam by answering two research questions (1) How does bank lending respond to the changes in business cycle and (2) Is there a difference in lending behavior across bank ownership types? The findings of this study provide new and comprehensive evidence on bank lending in Vietnamese banks It suggests that government – owned banks play an important role in stabilizing the credit market in Vietnam over the business cycle In addition, government-owned banks are less sensitivity to the change of business cycle than private banks in a booming period It confirms that alternative policy tools via government – owned bank is appropriate for the management strategy of emerging countries like Vietnam as they play a dominant role in the process of financial resource allocation for economic developments The paper is structured in sections Section reviews empirical studies on bank lending behavior and its determinants including ownership and business cycle factors Section presents the research models investigating the impact of government ownership and business cycle on the lending behavior in Vietnamese banks and justifies the technique used to estimate these model Section presents empirical findings on the impact of bank government ownership and business cycle on the lending behavior of banks in Vietnam Finally, section draws a conclusion of the study and highlights the policy implications Literature review There is a voluminous strand of literature regarding the relation between government ownership, bank performance and economic growth The development view of Gerschenkron (1962) holds that the government’s participation in banking and financial sector is necessary to economic growth since it increases the likelihood of allocating funds to long-term strategic projects that mainly contribute to the economic development On the contrary, the political view by Shleifer and Vishny (1994) argues that the state ownership in banks gives the government opportunity to allocate funds for the shake of political interest such as bribes or getting the votes in the election periods, therefore lowering economic efficiency The latter view is supported by a number of empirical evidences employing cross country data Barth et al (2001) and La Porta et al (2002) document that higher level of state ownership of banks is associated to greater bank inefficiency and lower financial development The presence of state ownership is also found to have a negative impact on financial stability and economic growth (La Porta et al., 2002) The results from a number of studies in individual countries are consistent with this view For instance, the cost efficiency of state-owned banks is lower than that of private banks in Argentina (Berger et al., 2005) or less efficient, less profitable and have a lower quality of assets in China (Lin and Zhang, 2009) However, there is sparse literature about the impact of government ownership on banks’ lending behavior over the business cycle Moreover, the results from empirical evidences are inconsistent Employing the data on Western European banks for the period 2000 to 2009, Iannotta et al (2011) shows the indifference of lending behavior across the business cycle between state-owned banks and private banks Cull and Peria (2013) finds 286 that the impact of government ownership in banks on their credit growths depends on geographic regions Examining the lending behavior of Eastern European and Latin American banks during the crisis 2008-2009, the study concludes that credit growth of state-owned banks is counter cyclical in the latter group but not in the former one Brei and Schclarek (2013) examines an international dataset of 50 countries for the period of 1994-2009 and concludes that state-owned banks increase their credit in the time of crisis, suggesting that the government actively interfere the flows of funds through its ownership in banks The government’s presence in banks is found to maintain better the credit growth during the recent global financial crisis in some economies that were belong to the former Soviet Union (De Haas et al., 2012) Micco and Panizza (2006) argues that stateowned banks play a crucial role in stabilizing credit in the economy, explaining for their less pro-cyclical lending behavior compared to their private counterparts Holding the same view with Micco and Panizza (2006), Bertay et al (2015) employs an international dataset from 1999 to 2010 and finds that the amount of loans provided by state-owned banks is less pro-cyclical than that of private banks The Vietnamese context shows the influence of government in the banking sector as well as the role of state-owned banks in the economic outcomes As a transitional economy, Vietnam experienced an economic reform in 1986 that allowed the privatization of banking sector Although this reform introduced the presence of private banks together with state-owned banks in the economy, the latter group still shows its dominance to the former group in terms of size, profitability and efficiency (Nguyen et al., 2016a) In addition, the government is likely to implement its objective in stabilizing macroeconomic environment through its ownership in banking sector State-owned banks, therefore, are expected to play a useful role in stabilizing credit over the business cycle Moreover, due to a longer establishment and a better bank governance than their counterpart, state-owned banks in Vietnam are possibly considered to be safer than private banks, leading to the fact that they can enjoy a stable deposit base, enabling them to easily stabilize their lending over the cycle Based on these arguments, we postulate two hypotheses on banking lending behavior of the Vietnamese banking sector as follows: Hypothesis (H1): The lending behavior of Vietnamese banking sector is procyclical Hypothesis (H2): The bank lending of state-owned banks is less pro-cyclical than that of private banks in the Vietnamese banking sector Research methodology Research model To examine the lending behavior with regard to the ownership and business cycle, the study employs theoretical model given by Kashyap and Stein (1995) The model was later modified by several researchers such as Gambacorta (2005), Mistrulli (2004) and Bertay et al (2012) Specifically, two models are given in response to the research questions as follows: Model 1: Bank lending behavior responds to the business cycle 𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡 = 𝛼𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡−1 + 𝛽 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑖,𝑡 + 𝛿𝐵𝑎𝑛𝑘 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡 + 𝜀𝑖,𝑡 Model 2: The role of government ownership on Bank lending behavior and business cycle 𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡 = 𝛼𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡−1 + 𝛽 𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒𝑖,𝑡 + 𝜕𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 ∗ 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒𝑖,𝑡 + 𝛿𝐵𝑎𝑛𝑘 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡 + 𝜀𝑖,𝑡 Where Bank lending is measured by the log of loan volume of bank i in year t; Business cycle is measured by the GDP growth rate in year t; 287 (1) (2) Government ownership is a dummy variable which takes if the government ownership in banks is over 50% and if otherwise; Bank specific variables are controlling ones including capitalization, liquidity and bank size Due to the potential endogeneity of GDP growth rate to the lending volume and the presence of lagged independent variables in the models, we employ the one-step system GMM estimation Furthermore, the GMM estimator is also designed to address the fixed effects problem that is caused by the unobserved bankspecific factors in the error terms All independent variables except the GDP growth rates, the government ownership variables and the interaction terms between them are treated as predetermined variables that allows the correlation between the current values of them with the past and present error terms but not with the future ones To examine the appropriateness of the GMM estimators, we respectively conduct the Hansen test for the overidentifying restrictions and the Arellano Bond test for autocorrelation of error terms The null hypothesis of the first test is that the overidentifying restriction is valid, meaning that the instruments are valid when the null hypothesis is not rejected The null hypothesis of the second test is that there is no autocorrelation in the differences of residuals A second order test in first differences tests for autocorrelation in levels Therefore, it is expected that the null hypothesis of the second order test is not rejected Data sample The study utilizes an unbalanced panel, consisting of 30 main local banks in Vietnam for the period of 20102016 To capture the ownership of Vietnamese commercial banks, the study conducts two groups of commercial banks namely state-owned banks and private-owned banks The micro-level data of commercial banks is collected from Bankscope provided by Bureau Van Dijk while the data of GDP growth rates is collected from IMF database Table 1: Variable measurements and data sources Variables Lending behavior Government ownership Measure log of loans Dummy variable for government ownership (1 for >=50% and for otherwise) GDP growth rate Bank size Deposit on liablity Equity on asset Liquidity annual growth rate of real gdp log of total assets deposit/liablility equity/asset liquid assets/ total assets Data sources Bankscope, financial report Bankscope, annual report International Financial Statistics - IMF database Bankscope, financial report Bankscope, financial report Bankscope, financial report Bankscope, financial report Table summarizes the measures and data sources of variables We employ the log of loans as a proxy of lending behavior of banks The main explanatory variables are the government ownership in banks (a dummy variable that takes if the percentage of government ownership is higher than 50% and for otherwise) and business cycle that is represented by the annual growth rates of GDP To examine the effects of government ownership on the lending behavior over the business cycle, we employ the interaction term of government ownership dummy and GDP growth rates As in our first hypothesis, we expect that business cycle is positively related with lending behavior of banks while as in our second hypothesis, we expect there is a negative relation between the interaction term and the dependent variable We also include several bank specific factors as controlling variables in the models The first one is bank size that is measured by the log of total assets We construct the ratio of equity to total assets as a proxy of bank soundness Another controlling variable is liquidity that is measured by the percentage of liquid assets in total assets This variable indicates 288 the lending ability and inefficiency of banks Finally, the ratio of deposit over liability shows the stability of banks’ funding The statistics summary of all variables are presented in table Table 2: Descriptive statistics Variable Lending behavior GDP growth rate Government ownership Bank size Deposit on liability Equity on asset Liquidity Obs 202 210 210 202 201 201 202 Mean 19.17 0.06 0.13 15.28 0.62 0.10 0.22 Std Dev 1.21 0.01 0.34 1.08 0.14 0.05 0.12 Min 16.67 0.05 0.00 13.05 0.18 0.04 0.02 Max 21.91 0.07 1.00 17.63 0.91 0.38 0.61 Empirical findings Table reports the empirical results of this study Our first concern is the relation between business cycle and the lending behavior that is informed by the coefficient on business cycle in the first model The first column of table shows that the coefficient on GDP growth rate enters positively that is significant at 1% level, meaning that banks expand their loans volume in booming periods of economy In other words, banks show their procyclical behavior in lending This result confirms the role of financial institutions in providing funds that is essential to the economic development Our second concern is whether there is a difference between the lending behavior of state-owned banks and private banks over the business cycle It could be seen from the second column of table that the coefficient on GDP growth rates still holds a positive sign and that is significant at 10% level when we include the interaction term between government ownership dummy and GDP growth rates in the model In addition, the interaction term is negatively related to the dependent variable and significant at 1% level These reveal that the effects of the lending behavior of banks over the business cycle vary depending on their types of ownership Compared to private banks, state-owned banks show that they are less procyclical in lending behavior, meaning that the loans volume of state-owned banks is less than that of private banks in booming periods but in recession, they lend more than their private counterparts This finding is consistent with our second hypothesis and the results of Micco and Panizza (2006) and Bertay et al (2015), showing the role of government in stabilizing funds in the economy via their ownership in banks The potential explanation for that result is that state-owned banks have chance to enjoy a more stable deposit base than private banks since they are dominant in size, better in governance from depositors’ views and are likely to receive the support from government This results in a less sensitivity to the change of business cycle in the cost of funding of state-owned banks compared to their private counterparts In addition, all regressions pass the second oder test of autocorrelation and Hansen overidentifying tests, showing the validity of instruments Table 3: Empirical results Variables Lagged log of loans GDP growth rate Model 0.256** (0.013) 5.141*** (0.001) GDP growth rate * government ownership 0.878*** (0.000) Bank size 289 Model 0.462*** (0.000) 3.029 * (0.095) -14.149 *** (0.000) 0.677*** (0.000) Deposit on liability Equity on asset Liquidity 0.629*** (0.000) 2.560*** (0.000) -0.577*** (0.000) 0.163 (0.251) 0.547 (0.313) -0.902*** (0.000) The dependent variable is lending behavior measured by the log of loans GDP growth rate is the rate of annual real GDP Government ownership is a dummy variable that takes if the percentage of government ownership in banks is higher than 50% and for otherwise Bank size is the log of assets Deposit on liability is the ratio of deposit over liability Equity on asset is the ratio of equity over total assets Liquidity is the ratio of liquid assets over total assets All regressions are estimated by one-step system GMM estimator with Winmeijer correction The p-values are given in parentheses *, ** and *** respectively stand for significance at 10%, 5% and 1% Conclusions The bank lending is essential for economic development with regards to its allocation process of financial resources to the whole economy This study analyses the bank lending behavior in the Vietnamese context by taking into account the effects of business cycle and governement ownership over the period 2010 - 2016 The study confirm procyclical effect of business cycle on the lending behavior state highlight an important role of bank lending of financial institutions in an emerging market In addition, this study also provide a comprehensive picture of the bank behavior of banks in Vietnam by taking into account the interaction of bank ownership and business cycle Especially, the findings on the role bank ownership and interest rate will be useful for the policy makers and bank managers who are interested in the lending behavior of Vietnamese banks Reference 290 ... equity/asset liquid assets/ total assets Data sources Bankscope, financial report Bankscope, annual report International Financial Statistics - IMF database Bankscope, financial report Bankscope,... of banks The main explanatory variables are the government ownership in banks (a dummy variable that takes if the percentage of government ownership is higher than 50% and for otherwise) and business. .. due to a longer establishment and a better bank governance than their counterpart, state-owned banks in Vietnam are possibly considered to be safer than private banks, leading to the fact that they