Working Paper: NBER ID: w24961
Authors: Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
Abstract: We study the consequences of month-end lending incentives for Chinese bank managers. 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 95 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 26 percent 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.
Keywords: Lending; Banking; Performance Targets; Loan Quality; China
JEL Codes: G21; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| month-end lending targets (G21) | distort capital allocation (D61) |
| month-end lending targets (G21) | increase in lending (G21) |
| month-end lending targets (G21) | increase in loan size (H81) |
| month-end lending targets (G21) | increase in bad loans (G21) |
| incremental loans made to hit targets (G51) | increase in likelihood of bad loans (G21) |