Commonality, macroeconomic factors and banking profitability


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.

Working Paper IREA, Universitat de Barcelona, 2021/13

This my first working paper join with Jorge M. Uribe and Diego F. Manotas-Duque as a result of our research in Asset-Liability Management in Banking.

👋 All Comments are welcome.

Orlando Joaqui Barandica
Orlando Joaqui Barandica
PhD(C) in Industrial Engineering

My research interests include energy markets, asset and liability management, quantitative finance, applied econometrics and statistical, and data visualization.