Bank herding in loan markets: Evidence from geographical data in Japan

Abstract This paper investigates whether Japanese banks followed herd behavior in loan markets during 1980–2000. Using data categorized by bank type and geographical area, we examine leader–follower relationships between the behavior of different bank types. We find evidence of their herding that is not explained by macroeconomic conditions. In particular, regional types of banks always followed banks that had large loan shares in individual areas. Such herding was observed more frequently in regional areas. Unusual herding by major banks was observed from immediately before the Japanese asset‐price bubble in the late 1980s to its bursting in the early 1990s. During the bubble period, the estimated amount of loans raised by major banks' herding in urban areas was greater than 2% of the average annual nominal GDP in the period, overwhelming that of herding by other types.