Regional Economic Conditions and the Variability of Rates of Return in Commercial Banking

Abstract

We develop new techniques to assess the relationship between commercial bank performance and the economic conditions in the markets in which they operate. In the analysis, we allow for heterogeneity in the responses of banks to regional economic conditions. We find a statistically significant relationship between bank performance and shocks to the regional markets in which they operate. We find that region-specific shocks have a significant and persistent effect on the cross-sectional variance of bank performance in the market. That is, shocks affecting average performance of banks in a region also tend to increase the dispersion of their performance. We demonstrate that this effect is due to heterogeneity in the banks' exposures to their regional economies. Moreover, by allowing for this heterogeneity, we find that systematic responses to regional economic effects are notably more important in explaining the variation in bank performance than suggested by analysis in which responses are constrain to be the same for all banks.

Financialization and Space: Theoretical and Empirical Contributions | Financeirização e Espaço: Contribuições Teóricas e Empíricas

“…Space rules the diversity of characteristics that affect the spread of financial relations: different degrees of available information may impede the establishment of specific complex financial activities (FURLONG and KREINER, 2007;CROCCO, 2012); various economic conditions change the liquidity and prospects for the region (CROCCO et al, 2010b;CAVALCANTE, 2012), which may also affect the dynamics of financialization; more importantly, the social and cultural regional identities also permeate the credit and debit relations, thereby affecting the pace of financialization throughout the territory. By following such a framework, while considering the spatial properties of financialization processes, it may be assumed that the financial motives, actors and services behave in different manners throughout the territory.…”