Working Paper: NBER ID: w22089
Authors: Rüdiger Fahlenbrach; Robert Prilmeier; Ren M. Stulz
Abstract: From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperforms the common stock of banks with loan growth in the bottom quartile over the next three years. The benchmark-adjusted cumulative difference in performance over three years exceeds twelve percentage points. The high growth banks also have significantly higher crash risk over the three-year period. This poor performance is explained by fast loan growth as asset growth separate from loan growth is not followed by poor performance. These banks reserve less for loan losses when their loans grow quickly than other banks. Subsequently, they have a lower return on assets and increase their loan loss reserves. The poorer performance of the fast growing banks is not explained by merger activity and loan growth through mergers is not accompanied by the same poor loan performance. The evidence is consistent with fast-growing banks, analysts, and investors failing to properly appreciate the extent to which the fast loan growth results from making riskier loans and failing to charge for these risks correctly.
Keywords: No keywords provided
JEL Codes: G01; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fast loan growth (G21) | poor bank performance (G21) |
| fast loan growth (G21) | riskier loans (G21) |
| riskier loans (G21) | higher loan losses (G33) |
| higher loan losses (G33) | poor bank performance (G21) |
| fast loan growth (G21) | lower return on assets (ROA) (G32) |
| lower return on assets (ROA) (G32) | poor bank performance (G21) |
| fast loan growth (G21) | inadequate loan loss provisions (G21) |
| inadequate loan loss provisions (G21) | lower return on assets (ROA) (G32) |
| fast loan growth (organic) (O16) | poor bank performance (G21) |
| fast loan growth (through mergers) (G21) | NA (no negative outcomes) (Y70) |