Abstract

During healthy economic/financial times, credit growth often happens without proper provisioning. This is due to a managerial myopia that underestimates the risks underlying an expansive lending policy, leading to lower profitability in following years. However, given the countercyclicality of credit standards, this effect shouldn’t occur during harsh times. In this paper, we analyse the relationship between abnormal credit growth and bank profitability during a crisis period. In particular, we test the hypothesis that during a crisis, abnormal credit growth improves bank profitability, given the need for higher, or at least stable, credit standards. We find support for this assumption using a sample of 101 large European banks observed during the recent crisis period. Results are robust to different robustness checks.
Original languageEnglish
Pages (from-to)36-53
Number of pages18
JournalINTERNATIONAL JOURNAL OF BUSINESS AND MANAGEMENT
DOIs
Publication statusPublished - 2019

Keywords

  • bank profitability
  • financial crisis
  • loan growth
  • loan loss provisions

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