Why Do Banks Target ROE?

George Pennacchi and Joao Santos

No 20181010, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Nonfinancial corporations focus on the growth in earnings per share (EPS) to benchmark their performance. Banks used to follow a similar practice, but starting in the late 1970s they began to emphasize return on equity (ROE) instead. In this blog post, we outline findings from our recent staff report, which argues that banks had an incentive to make this change when their charter values eroded owing to increased competition, and the incentive to change was magnified by risk-insensitive deposit insurance.

Keywords: ROE (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2018-10-10
New Economics Papers: this item is included in nep-ias
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Journal Article: Why do banks target ROE? (2021)
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