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Regional economic conditions and the variability of rates of return in commercial banking

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Author Info
Frederick Furlong
John Krainer

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Abstract

We develop new techniques to assess the relationship between commercial bank performance and the economic conditions in the markets in which they operate. In the analysis, we allow for heterogeneity in the responses of banks to regional economic conditions. We find a statistically significant relationship between bank performance and shocks to the regional markets in which they operate. We find that region-specific shocks have a significant and persistent effect on the cross-sectional variance of bank performance in the market. That is, shocks affecting average performance of banks in a region also tend to increase the dispersion of their performance. We demonstrate that this effect is due to heterogeneity in the banks' exposures to their regional economies. Moreover, by allowing for this heterogeneity, we find that systematic responses to regional economic effects are notably more important in explaining the variation in bank performance than suggested by analysis in which responses are constrain to be the same for all banks.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-21.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-21

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Keywords: Banks and banking ; Bank profits;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Yeager, Timothy J., 2004. "The demise of community banks? Local economic shocks are not to blame," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2135-2153, September. [Downloadable!] (restricted)
  2. Frederick Furlong, 2004. "Comment on Emmons, Gilbert, and Yeager," Journal of Financial Services Research, Springer, vol. 25(2), pages 283-289, April. [Downloadable!] (restricted)
  3. Andew Cohen & Michael Mazzeo, 2004. "Market structure and competition among retail depository institutions," Finance and Economics Discussion Series 2004-04, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Michelle Clark Neely & David C. Wheelock, 1997. "Why does bank performance vary across states?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-40. [Downloadable!]
  5. Andrew P. Meyer & Timothy J. Yeager, 2001. "Are small rural banks vulnerable to local economic downturns?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 25-38. [Downloadable!]
  6. Morgan, Donald & Rime, Bertrand & Strahan, Philip E., 2004. "Bank Integration and State Business Cycles," SIFR Research Report Series 30, Institute for Financial Research. [Downloadable!]
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  1. Fred Furlong & John Krainer, 2007. "Regional economic conditions and community bank performance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jul 27. [Downloadable!]
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This page was last updated on 2009-11-26.

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