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Sectoral Loan Concentration and Bank Performance (2001-2014)

Kristen Regehr and Rajdeep Sengupta

No RWP 16-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Sectoral loan concentration is an important factor in bank performance. We develop a measure of sectoral loan concentration and study how community bank performance and the size-performance relationship vary with loan concentration and changes in loan concentration. The size-profitability relationship varies with concentration in the residential real-estate (RRE) sector. Higher RRE concentration is associated with lower returns especially for larger community banks?banks with assets totaling a billion or more. Concentration in other sectors, such as agriculture and commercial real estate (CRE), is significantly associated with risk of bank failure or acquisition. {{p}} Results for changes in concentration appear to be driven by the boom in CRE. Large positive (negative) changes in CRE concentration are both preceded and followed by large increases (decreases) in overall returns. Banks that switch specializations increase the hazard of failure but decrease the odds of being acquired.

Keywords: Acquisitions; Loan concentration; Bank failures; Commercial banks (search for similar items in EconPapers)
JEL-codes: G21 G34 G33 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-11-01, Revised 2016-11-01
New Economics Papers: this item is included in nep-ban and nep-cfn
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