This paper uses psychological biases in behavioral finance—heuristic bias and loss/risk aversion—to explain the lending behaviors of banks in Taiwan. The relationship between the time following high non-performing loans and loan decisions is examined. This paper employs loan growth rate, loan-deposit interest rate spread, and collateral loan-to-total loan ratio to measure loan decision criterions. The sample is 36 banks with the period between June, 2003 and December, 2008, and panel data is analyzed by regression method. Sample banks are categorized by three rules, which are whether the stocks are publicly traded, nation-owned vs. privately-owned, and new vs. old banks. The findings are as follows. After controlling the other factors affecting loan supply and demand, there are distinctive psychological biases between both banks with different sizes and types. This bias is mainly loss/risk aversion and exhibited in the decisions of both loan growth and interest rate spread. Banks with small size have higher irrational biases than those with big size for both decisions on loan growth and collateral loan ratio. Non-publicly-traded, nation-owned, and old banks have higher loss aversion biases than publicly-traded, privately-owned, and new ones, respectively. Thus, the institutional memory hypothesis is unable to completely explain the pocyclical behaviors of lendings, and the degree of rational for loan behaviors of sample banks in Taiwan should be improved.
