Risk Overhang, Risk Tolerance, and Profitability in Sectoral Lending of Australian Thrift Institutions
We estimate a dynamic panel portfolio choice model of the supply of new lending of Australian thrifts (credit unions and building societies, dented CUBS) where new residential, personal and commercial lending is influenced by risk overhang, risk tolerance, and profitability of alternative types of lending. Our results are consistent with the risk overhang model, with evidence of significant same-sector and cross-sector risk overhang effects on CUBS new lending. CUBS also allocate funds towards more profitable loan sectors and increase the proportion of assets held as loans when they become more risk tolerant. Adjustment to long-run equilibrium is generally rapid with much of the adjustment complete in four quarters.
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