The Impact of Lending Growth on the Riskiness of Chinese Banks

Abstract

Abstract We investigate the impact of the growth in lending on the riskiness of Chinese banks from 1992 to 2007. We find that loan growth has a significant impact on a bank’s credit risk, return, and capital adequacy. The growth in lending leads to increases in loan loss provisions and interest income, and to lower capital ratios. Moreover, we find that the effect of lending growth on the riskiness of Chinese banks is more pronounced in recent years since the banking sector has experienced a dramatic expansion. These results suggest that loan growth represents an important driver of the riskiness of banks, and Chinese banks in general show prudent provisioning behavior.