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Commonality, macroeconomic factors and banking profitability

Orlando Joaqui-Barandica (), Diego F. Manotas-Duque () and Jorge Uribe ()
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Diego F. Manotas-Duque: Universidad del Valle, Faculty of Engineering, School of Industrial Engineering, Colombia.

No 202113, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

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, corporate indebtedness. 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; Indebtedness; Dynamic factors; Financial cycles. JEL classification: E44; G20; G21. (search for similar items in EconPapers)
Pages: 38 pages
Date: 2021-06, Revised 2021-06
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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