Empirical estimation of banks' herding in the Korean loan markets

This paper presents an improved index for measuring the intensity of herding. The index presented in this paper is able to measure the intensity of an individual economic agent's herding and it conforms to the economic definition of herding. The results of measuring Korean banks' herding using the index show that the intensity of banks' herding in the household loan market was high from late 2002 to early 2003 and that in the SME loan market was high around early 2004 and late 2006. These days, however, the herding indexes for both these loan markets are on the decrease. Next, the results of empirical estimations that use the intensity of each bank's herding as an dependent variable, and the proxies of the factors affecting banks' herding as independent variables, reveal that a bank with smaller amount of information is more likely to herd. And a bank that attaches less importance to liquidity or has a lower loan market share tends to herd greatly. It is also found that variables indicating the level of business activity or loan market structure can explain changes in the intensity of herding: the higher is the M1/Lf ratio, the severity of competition among banks, or loan market concentration, the greater the intensity of herding.