Research on the Bank Lending Behavior and Different Measures of Bank Asset Quality

Abstract

This studys goal was to testify if the bank asset liquidity measures, namely the Net Substandard Loan Ratio, the Liquidity Ratio, and the Highly Liquid Asset Ratio, have bi-directional correlation with their lending behavior, specifically the loan growth rate. A number of different models were used to test the explanatory power of both direction, with the independent variables having one period lag from the dependent variable. The results showed that it is possible the bank loan decisions are insulated from the increase or decrease of the asset liquidity measures in the previous period. Rather, the loan growth rate of the current period can be better explained by the macroeconomic variables. Meanwhile, the Net Substandard Loan Ratio can be explained by the previous periods loan growth status. Then, there exists a reasonable incentive for banks with low Net Substandard Loan Ratio to increase loan to recover the asset liquidity measure. Liquidity Ratio, however, did not have significant explanatory power not only on the next periods bank loan decision but also on the market-wide liquidity level.