Do Local Labor Market Conditions Impact Bank Profitability?

Abstract

This paper studies the impact of local unemployment shocks on bank profitability. Our work advances on previous studies that only use national or state level data, as we create bank-specific measures of local unemployment in which the bank has exposure. Using these novel measures, we can determine how shocks to unemployment affect each individual bank's profitability. Our results indicate that an increase in the local market unemployment rate decreases bank profitability on average by 2.9%. We further examine what components of bank profitability are most impacted by local labor market conditions and find that net interest income is most impacted.

Keywords: banking, labor market, unemployment rate, profitability

JEL Classification: G20, G21, E32