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"Commonality, macroeconomic factors and banking profitability"

Author

Listed:
  • Orlando Joaqui-Barandica

    (Universidad del Valle, Faculty of Engineering, School of Industrial Engineering, Colombia.)

  • Diego F. Manotas-Duque

    (Universidad del Valle, Faculty of Engineering, School of Industrial Engineering, Colombia.)

  • Jorge M. Uribe-Gil

    (Faculty of Economics and Business, Open University of Catalonia and Riskcenter, University of Barcelona, Spain.)

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.

Suggested Citation

  • Orlando Joaqui-Barandica & Diego F. Manotas-Duque & Jorge M. Uribe-Gil, 2021. ""Commonality, macroeconomic factors and banking profitability"," IREA Working Papers 202113, University of Barcelona, Research Institute of Applied Economics, revised Jun 2021.
    • Handle: RePEc:ira:wpaper:202113
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    File URL: http://www.ub.edu/irea/working_papers/2021/202113.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Joaqui-Barandica, Orlando & Oviedo-Gómez, Andres & Manotas-Duque, Diego F., 2023. "Directional predictability between interest rates and the Stoxx 600 Banks index: A quantile approach," Finance Research Letters, Elsevier, vol. 58(PA).
    2. Changjun Zheng & Sinamenye Jean-Petit, 2023. "The Effects of the Interactions Between Agro-Production, Economic, and Financial Development on Bank Sustainability," SAGE Open, , vol. 13(2), pages 21582440231, June.

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    More about this item

    Keywords

    Banks’ ROA; Indebtedness; Dynamic factors; Financial cycles. JEL classification: E44; G20; G21.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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