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.
1. 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 do. 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 5 sections. Section 2 reviews empirical studies on bank lending behavior and its
determinants including ownership and business cycle factors. Section 3 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 4 presents empirical findings on the
impact of bank government ownership and business cycle on the lending behavior of banks in Vietnam.
Finally, section 5 draws a conclusion of the study and highlights the policy implications.
2. 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 1 (H1): The lending behavior of Vietnamese banking sector is procyclical
Hypothesis 2 (H2): The bank lending of state-owned banks is less pro-cyclical than that of private banks in
the Vietnamese banking sector

3. 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 1 if the government ownership in banks is over
50% and 0 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 0 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 1 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 1 if the percentage of government ownership is higher than 50% and 0 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 2.
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

4. Empirical findings

Table 3 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 3 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 3 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 1
0.256**

(0.013)
5.141***
(0.001)

GDP growth rate * government ownership
0.878***
(0.000)

Bank size

289

Model 2
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 1 if the percentage of government
ownership in banks is higher than 50% and 0 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%.
5. 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