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

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(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, governmentowned 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


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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 state-owned 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
,

=

, −1

+

ℎ ,

+

,

+

,

Model 2: The role of government ownership on Bank lending behavior and business cycle
,

=

, −1

ℎ

,

+

+

,

ℎ

+

,

+

ℎ

∗

,

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;

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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 bank-specific 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 2010-2016. 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
GDP growth rate
Bank size
Deposit on liablity
Equity on asset
Liquidity
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

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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
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
GDP growth rate * government ownership
Bank size

Deposit on liability
Equity on asset
Liquidity
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 pvalues 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

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