Bank expectations and prudential outcomes

Joel Suss (joel.suss@bankofengland.co.uk) and Adam Hughes (adam.hughes@bankofengland.co.uk)
Additional contact information
Joel Suss: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Adam Hughes: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1035, Bank of England working papers from Bank of England

Abstract: We study bank expectations using a unique and rich data set derived from regulatory returns. The data covers key bank-level variables, including profitability, capital, and loan impairments. We find that banks tend to be optimistic, expecting higher returns, higher capital ratios and fewer impairments than are subsequently realised. However, there is substantial variation in forecasting performance across banks, and banks with better quality governance and management tend to also have smaller forecast errors. We go on to examine the relationship between forecast performance and bank outcomes, finding that forecast errors are associated with greater prudential risk, even after controlling for bank and time fixed effects. Importantly, forecast errors have an asymmetric effect on bank outcomes – errors of optimism drive our findings. We find that forecast errors are also associated with lending – banks that have higher errors tend to have significantly lower subsequent loan growth.

Keywords: Banks; forecasts; prudential risk (search for similar items in EconPapers)
JEL-codes: G21 L20 M20 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-08-04
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-ger
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... dential-outcomes.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1035

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team (webmaster@bankofengland.co.uk).