Bank profits, loan activity, and monetary policy: evidence from the FDIC's Historical Statistics on Banking

• Date: 01 April 2017
• Author: Paul E. Orzechowski
• DOI: http://doi.org/10.1016/j.rfe.2016.11.002
• Published date: 01 April 2017

Bank profits, loan activity, and monetary policy: evidence from the FDIC's

Historical Statistics on Banking☆

Paul E. Orzechowski

Collegeof Staten Island—CUNY, Departmentof Finance, 2800Victory Blvd., StatenIsland, NY, United States

abstractarticle info

Articlehistory:

Received7 March 2016

Receivedin revised form 12 October 2016

Accepted2 November 2016

Availableonline 15 November 2016

Thispaper examines the long-runrelationship betweenbank profits, loan growth,and monetary policyat differ-

ent types of profitable banks. U.S. commercial bank data are analyzed from the FDIC's Historical Statistics on

Banking from 1966to 2013. The banks are divided into two groups basedon their relative profitability (above

orbelow the average profitrate) to examine theirreal estate and commercialloan activities.The bank's loan port-

folio allocation(i.e., the ratio between realestate and commercial loans) is also examinedto see if it has a rela-

tionship with monetary policy. The study finds evidence that mon etary policy has a slightly larger negative

relationship with real estate loans in banks with above ave rage profits than with their less profitable peers.

The analysisalso finds evidence suggestingthat commercial loan growthin low-profitbanksmaybemoresen-

sitive to theirloan loss provisions thanto monetary policy. The loanportfolio ratio shows a significantnegative

relationshipwith monetarypolicy and a positive relationshipwith provisions.The analysis revealsa positive co-

efficient or ‘perverseresult’between some of the commercial loan growth measuresand monetary policy that

may be explainedby portfolio shifting at banks.

© 2016 ElsevierInc. All rights reserved.

Keywords:

Bank lending

Bank loanportfolio

Bank profits

Monetarypolicy

1. Introduction

The main motivation behind this study is to examinethe long-run

relationship between loan growth in different types of profitable

banks and monetarypolicy. An additional and interconnectedmotiva-

tion is to test whether shifting ba nk loan portfolios, as suggested by

Den Haan, Sumner, and Yamashiro (2007), may help to explain some

of the relationship between loangrowth and changes in monetarypol-

icy. Do different types of profitable banks reactdifferently to monetary

policy in regard to their loan grow th patterns? Do different types of

profitable bankschange their loan portfoliomix given the same mone-

tary policy?

Kashyap and Stein (2000) found a pos itive relationship between

monetary policy changes and loan growth, which they referred to as

the “perverseresults”since the positiveresult is in contrast to the stan-

dard monetary transmission mechanism s prediction (see Mishkin,

1995). Den Haan et al. (2007) showed th at commercial lending in-

creases while real estate loans decreasesharply after monetary policy

tightening and speculated that active loan portfolio shifting in banks

might explainthis phenomenon. Theanalysis below also finds a similar

significantpositive relationshipbetween monetarypolicy and commer-

cialloan growth. In order to see if banksare shifting their loanportfolios,

this study examines the ratio of real estate loans to commercial loans

held at banks. The results of this ratio analysisshow some indications

of shifting loan portfolios in reaction to monetary policy, whi ch may

help explainthe “perverse results.”

The analysis contributes to and extends the broadmonetary litera-

ture by examining banks grouped by diff erent types of profitability

measurementsto see if they behave differently underthe same mone-

tary policyin regard to their loan growth andthe loan portfolio mix be-

tween real estateand commercial loans. To the best of my knowledge,

such an analysisof a bank's loan portfolio mix (i.e.,a ratio of real estate

loans to commercial loans) to see if it can help explainloan growth is

not found elsewhere in the literature. These estimations help to extend

and fill in thegaps in the related literatureconducted by Den Haan et al.

(2007) and Black and Rosen(2007), which raised questions regarding

how changes in monetary policy can caus e banks to shift their loan

portfolios.

In contrast,the traditional monetaryliterature focuseson bank cap-

ital, deposits, and interest rat es as important determinates of loan

growth, with little attentiongiven to the role of bank profitability. Ex-

amples of such traditional studiesinclude those by Kashyap and Stein

(2000) and Kishanand Opiela (2000, 2006).

This studyalso extends the literatureby examining annual long-run

datausing all U.S. insureddepository banks,unlike most monetarystud-

ies, which examine quarterly data over shorter time periods and use

only a portion of available banks (e.g. , Kashyap & Stein, 2000). As

such, this study is similar to that of Busch and Prieto (2014),who

Reviewof Financial Economics 33 (2017)55–63

☆This paper is related to part of my dissertati on work at the New School for Social

Research.

E-mailaddress: paul.orzechowski@csi.cuny.edu.

http://dx.doi.org/10.1016/j.rfe.2016.11.002

1058-3300/©2016 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe