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Cross-sectional dispersion and bank performance

Author

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

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.

Suggested Citation

  • Gkougkousi, Xanthi & John, Kose & Radhakrishnan, Suresh & Sadka, Gil & Saunders, Anthony, 2022. "Cross-sectional dispersion and bank performance," Journal of Banking & Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000619
    DOI: 10.1016/j.jbankfin.2022.106461
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    More about this item

    Keywords

    Loan; Dispersion; Loss; Bank;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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