The consequences of bank loan growth: Evidence from Asia

How much of non-performing loans can be explained by loan growth? If an increase in loan growth leads to higher profitability but does not necessarily cause non-performing loans to increase in the short run, banks with (managerial) short-termism will be ex ante incentivized to grant more loans to increase short-run profitability. Based on a final sample of publicly listed banks in 17 countries in Asia during the period 1995-2014, I find that in loan growth is not correlated with profitability but is positively associated with non-performing loans. In addition, banking sector development is positively associated with non-performing loans. The positive effect of loan growth on non-performing loans is stronger during financial crisis periods than tranquil times. These insights have the crucial consequences for central banks and banking supervisory authorities.