Does abnormal lending behavior increase bank riskiness? Evidence from Turkey

Abstract Purpose This study empirically analyzes whether the rapid growth of loans and risk-taking behavior during the expansion of loans affected non-performing loans (NPLs) and the solvency of financial institutions in the Turkish banking system. Design/methodology/approach Using the GMM Generalized Method of Moments, this study used data on Turkish banks from 2011 to 2017 to test two hypotheses on the effects of loan growth on NPLs and solvency. Findings This study finds significant results for the effect of loan growth on NPLs and solvency. NPLs rose from the previous year’s loan growth, which tended to reduce solvency. Research limitations/implications Due to selected research methods, the results may lack generality. Therefore, future studies should test the propositions herein further. Practical implications The results indicate that careful allocation behavior is required when lending. Additionally, these findings may be helpful to financial managers and decision makers. Originality/value This study confirms the need to determine how to allocate loans during the loan boom periods.