Cross-sectional dispersion and bank performance

Xanthi Gkougkousi, Kose John, Suresh Radhakrishnan, Gil Sadka and Anthony Saunders

Journal of Banking & Finance, 2022, vol. 138, issue C

Abstract: We examine the relation between cross-sectional earnings dispersion and the banking sector's performance. Theory suggests that cross-sectional earnings dispersion will lead to greater loan losses and higher interest rates. We confirm this hypothesis by showing a robust association between earnings dispersion and bank performance. Dispersion in earnings explains more of the overall bank performance than macroeconomic indicators for business cycles. We also find that banks tighten their lending standards and increase interest rates to partially compensate for future loan losses. Finally, we find that cross-sectional earnings dispersion is associated with dispersion in bank performance. The relation between dispersion in bank performance and earnings dispersion is declining over time suggesting that systematic risk is rising in the banking sector.

Keywords: Loan; Dispersion; Loss; Bank (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 M41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000619

DOI: 10.1016/j.jbankfin.2022.106461

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