Bank equity returns and oil prices: The story from U.S. regional banks during the “shale oil” revolution

Using monthly data from 1998 to 2020, we examine the relationship between equity returns and oil prices employing a multi-factor asset model to a sample of 124 U.S. regional banks classified by levels of oil exposure based on their headquarters’ location. We utilize the period when fundamental changes in innovation undertaken by the U.S. oil and gas industry (known as “shale”, “fracking” or “tight oil” formations) helped the U.S. to become today’s top world oil producer. We split our sample into pre (1998M1 to 2009 M12) and post (2010M1 to 2020M1) “U.S. shale oil revolution” periods. In the initial period, oil price changes have negative impact on equity returns of regional banks with no effects for the national bank sample. In the second period, we find very strong oil price effects on equity returns for the top 10 and top 5 regional bank subsamples, consistent with more local transactions to the energy sector. Quantity effects of changes in oil production are discussed, as well as several robustness checks for asymmetries, threshold values, and inclusion of dividends in total returns.