Sectoral Loan Concentration and Bank Performance (2001-2014)

48 Pages Posted: 10 Aug 2017

See all articles by Kristen Regehr

Kristen Regehr

Federal Reserve Bank of Kansas City

Rajdeep Sengupta

Federal Reserve Bank of Kansas City

Date Written: November 1, 2016

Abstract

Sectoral loan concentration is an important factor in bank performance. We develop a measure of sectoral loan concentration and study how community bank performance and the size-performance relationship vary with loan concentration and changes in loan concentration. The size-profitability relationship varies with concentration in the residential real-estate (RRE) sector. Higher RRE concentration is associated with lower returns especially for larger community banks — banks with assets totaling a billion or more. Concentration in other sectors, such as agriculture and commercial real estate (CRE), is significantly associated with risk of bank failure or acquisition. Results for changes in concentration appear to be driven by the boom in CRE. Large positive (negative) changes in CRE concentration are both preceded and followed by large increases (decreases) in overall returns. Banks that switch specializations increase the hazard of failure but decrease the odds of being acquired.

Keywords: Commercial Banks, Loan Concentration, Bank Failure, Acquisitions

JEL Classification: G21, G33, G34

Suggested Citation

Regehr, Kristen and Sengupta, Rajdeep, Sectoral Loan Concentration and Bank Performance (2001-2014) (November 1, 2016). Federal Reserve Bank of Kansas City Working Paper No. 16-13. Available at SSRN: https://ssrn.com/abstract=2888095 or http://dx.doi.org/10.2139/ssrn.2888095

Kristen Regehr (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Rajdeep Sengupta

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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