Does Regional Economic Performance Affect Bank Conditions? New Analysis of an Old Question

FRB of San Francisco Working Paper No. 2004-01

35 Pages Posted: 5 May 2004

See all articles by Mary C. Daly

Mary C. Daly

Federal Reserve Bank of San Francisco

John Krainer

Board of Governors of the Federal Reserve System

Jose A. Lopez

Federal Reserve Bank of San Francisco

Date Written: November 28, 2003

Abstract

The idea that regional economic performance affects bank health is intuitive and broadly consistent with the aggregate banking data. That said, micro-level research on this relationship provides a mixed picture of the importance, size, and timing of regional variables for bank performance. This paper helps reconcile the heterogeneous findings of previous research by: (1) employing a unique "composite measure" of regional economic performance that combines several regional indicators into a single index; (2) constructing bank-specific measures of regional economic conditions, based on bank deposit shares, that account for banks' presence in several states; and (3) estimating models for all banks and intra- and inter-state banks separately. Empirical results based on this bank-specific composite regional measure point to a tractable link between regional economic performance and bank health. The importance of regional variables holds for both intra- and inter-state banks. Out-of-sample forecasts indicate that the composite index also helps tie down the relative riskiness of bank portfolios across states. Finally, although interstate banks do seem to diversify away some of their portfolio risk, our analysis suggests it is too soon to conclude that interstate banks are immune from regional influences.

Suggested Citation

Daly, Mary Colleen and Krainer, John and Lopez, Jose Antonio, Does Regional Economic Performance Affect Bank Conditions? New Analysis of an Old Question (November 28, 2003). FRB of San Francisco Working Paper No. 2004-01. Available at SSRN: https://ssrn.com/abstract=530782 or http://dx.doi.org/10.2139/ssrn.530782

Mary Colleen Daly

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

John Krainer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jose Antonio Lopez (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-977-3894 (Phone)
415-974-2168 (Fax)

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