Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks

Topic:

Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks

Time&Date: 

12:00-13:30pm, 2018/8/24

Venue:

Room A619, Teaching A

Speaker:

Prof. Yongxiang Wang (University of Southern California)

We study the consequences of month-end lending incentives for Chinese bank man- agers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 80 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 28 per-cent more likely to eventually turn bad. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.