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Similarly, Foos et al. (2010) and Salas and Salas and Saurina (2002) revealed that the growth in abnormal loans in previous years is directly associated with loan losses at both the aggregate and the individual bank level.
Similarly, Foos et al. (2010) revealed that growth in abnormal loans in previous years is directly associated with loan losses at both the aggregate and individual bank level, while Gourinchas et al. (2001) found a weak relationship between lending booms and crisis outside Latin America.
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An increase in the capital requirement policy for rapidly growing banks is also needed because the problem of abnormal loan growth cannot be detected at the current time.
For instance, Amador et al. (2013) used a panel data approach to reveal abnormal loan growth and risk taking behavior of financial institutions in Colombia.
The results suggested that persistent growth in abnormal loan leads to a notable increase in the ratio of non-performing loan (NPLs) to total loan, with solvency found to be significantly negative in the long run.
Foos et al. (2010) used bank scope data on 16,000 banks in 16 major countries for 1997 2007, finding that growth in previous abnormal loan is directly associated with loan losses at aggregate level and individual bank level.
Numerous studies describe the consequences of abnormal loan growth; therefore, if growing financial sector in developing countries such as Pakistan uses the experiences of bank-based economy, it will help in future.
We recommend strong and prudential regulations and an increase in the capital requirement policy for rapidly growing banks because the problem of abnormal loan growth cannot be detected at the current time.
The presented findings, support those of existing empirical studies, which suggest that abnormal loan growth during a lending booms increases the ratio of NPLs to gross advances and that rapid growth in bad loans diminishes the capital ratio, which indicates a decrease in bank solvency.
I find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10 15%.
In previous global crashes, abnormal concentrations of market participants began to engage in similar investment strategies portfolio insurance back in the 80s and leveraged housing loans more recently.
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