Xanthi Gkougkousi, a Vice President in our Washington, DC office, recently co-authored a paper entitled “Cross-sectional dispersion and bank performance” which appears in the Journal of Banking & Finance. The article studies the association between cross-sectional earnings dispersion and the banking sector’s performance.
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.
This article was originally published by the Journal of Banking & Finance and is available in pdf format here. The views expressed are those of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees, or clients.