Commonality, macroeconomic factors and banking profitability

Orlando Joaqui-Barandica, Diego F. Manotas-Duque and Jorge Uribe

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: We study banks’ profitability in the US economy by means of dynamic factor models. Our results emphasize the importance of a few common cyclical market factors that greatly determine banking profitability. We conduct exhaustive regressions in a big data set of macroeconomic variables aiming to gain interpretability of our statistical factors. This allows us to identify three main macroeconomic factors underlying banking profitability: the financial burden of households and economic activity; household income and net worth and, in the case of ROA and ROE, stress in financial markets. We also provide an integrated perspective to analyse banks’ profitability dynamically and to inform policymakers concerned with financial stability issues, for which banks’ profitability is fundamental. Our models allow us to provide several rankings of vulnerable financial institutions considering the common market forces that we estimate. We emphasize the usefulness of such an exercise as a market-monitoring tool.

Keywords: Banks’ ROA; Stress in financial markets; Dynamic factors; Financial cycles (search for similar items in EconPapers)
JEL-codes: E44 G20 G21 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000663

DOI: 10.1016/j.najef.2022.101714

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