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Why Does Fast Loan Growth Predict Poor Performance for Banks?

Author

Listed:
  • Rüdiger Fahlenbrach
  • Robert Prilmeier
  • René M. Stulz

Abstract

From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperformed the common stock of banks with loan growth in the bottom quartile over the next three years. After the period of high growth, these banks have a lower return on assets and increase their loan loss reserves. The poorer performance of fast-growing banks is not explained by merger activity. The evidence is consistent with banks, analysts, and investors being overoptimistic about the risk of loans extended during bank-level periods of high loan growth. Received September 14, 2016; editorial decision May 28, 2017 by Editor Itay Goldstein.

Suggested Citation

  • Rüdiger Fahlenbrach & Robert Prilmeier & René M. Stulz, 2018. "Why Does Fast Loan Growth Predict Poor Performance for Banks?," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1014-1063.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:3:p:1014-1063.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx109
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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