Forming Appropriate Peer Groups for Bank Research: A Cluster Analysis of Bank Financial Statements
36 Pages Posted: 20 Jun 2018
Date Written: June 4, 2018
Choosing appropriate peer groups for bank research is important to evaluate safety and soundness, merger effects, and overall performance. We use commercial bank financial statements with common size variables as the inputs to a cluster analysis model to identify clusters or groups of banks with financial structures that are relatively homogeneous within groups and distinct across groups. Using data from 2014 year-end Reports of Condition and Income, we cluster 6,444 banks into several such groups. Our results show that bank clusters are formed largely around loan types and that using our groups can improve explanatory power in regression models when compared to grouping on bank size.
Keywords: Commercial bank taxonomy, Financial institutions, Cluster Analysis, Bank financial statements, Bank peer groups
JEL Classification: G21
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