Rüdiger Fahlenbrach is Associate Professor at the Swiss Finance Institute at Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland; Robert Prilmeier is Assistant Professor at Tulane University A.B. Freeman School of Business; and René M. Stulz is Everett D. Reese Chair of Banking and Monetary Economics at The Ohio State University Fisher College of Business. The post is based on their recent article, forthcoming in the Review of Financial Studies.
In our article, Why Does Fast Loan Growth Predict Poor Performance for Banks?, which was recently accepted for publication in the Review of Financial Studies, we show that the common stock of U.S. banks with loan growth in the top quartile of banks significantly underperforms the common stock of banks with loan growth in the bottom quartile.
Many recent papers find that credit booms generally end poorly and are followed by poor economic performance. A number of theories have been advanced to explain this phenomenon. Most of the empirical analyses examining these theories have focused on country-level evidence. We instead investigate bank-level credit growth and subsequent returns within a single country and ask what the results imply for these theories. We analyze a panel of U.S. publicly listed banks between 1972 and 2014. Such a long time series has the benefit of enabling us to show that the phenomenon we document is persistent and is not the result of changes in bank regulations or in bank governance.