Cross-sectional dispersion and bank performance

We examine the relation between cross-sectional earnings dispersion and the banking sector's perfor-mance. Theory suggests that cross-sectional earnings dispersion will lead to greater loan losses and higher interest rates. We confirm this hypothesis by showing a robust association between earnings dis-persion and bank performance. Dispersion in earnings explains more of the overall bank performance than macroeconomic indicators for business cycles. We also find that banks tighten their lending stan-dards and increase interest rates to partially compensate for future loan losses. Finally, we find that cross-sectional earnings dispersion is associated with dispersion in bank performance. The relation between dispersion in bank performance and earnings dispersion is declining over time suggesting that system-atic risk is rising in the banking sector.(c) 2022 Elsevier B.V. All rights reserved.

Automated summary

This study examines the relationship between cross-sectional earnings dispersion and banking sector performance. The findings confirm that cross-sectional earnings dispersion has a significant impact on bank performance, and it explains more of the overall bank performance than macroeconomic indicators. Banks tighten lending standards and increase interest rates to partially offset future loan losses. Additionally, there is a correlation between cross-sectional earnings dispersion and dispersion in bank performance, although this correlation is declining over time, indicating an increasing systematic risk in the banking sector.