Commonality,macroeconomic factors and banking profitability |
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| Institution: | 1. Universidad del Valle, Faculty of Engineering, School of Industrial Engineering, Colombia;2. Faculty of Economics and Business, Universitat Oberta de Catalunya and IREA, University of Barcelona, Spain;2. University of Rome Tor Vergata, Dipartimento di Economia e Finanza, Via Columbia 2, 00133 Roma, Italy;4. Università Politecnica delle Marche, School of Business Giorgio Fuà, Money and Finance Research Group (MoFiR), Piazza Martelli 8, Ancona, Italy;1. Department of Economics and Analysis, Federal University of Amazonas, Brazil;2. Department of Economics and International Relations, Federal University of Santa Catarina, Brazil;1. Department of Finance and Investment, College of Economics and Administrative Sciences, Al-Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh 5701, Saudi Arabia;2. LARTIGE, ASTURIMA, University of Sousse, Tunisia;3. Indian Institute of Management (IIM) Bodh Gaya, Bodh Gaya, India;4. Lebow College of Business, Drexel University, Philadelphia, USA;5. Institute of Business Research, University of Economics Ho Chi Minh, Vietnam |
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| 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, stress in financial markets. 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. |
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| Keywords: | Banks’ ROA Stress in financial markets Dynamic factors Financial cycles |
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