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

Abstract

This paper examines the long-run relationship between bank profits, loan growth, and monetary policy at different types of profitable banks. U.S. commercial bank data are analyzed from the FDIC's Historical Statistics on Banking from 1966 to 2013. The banks are divided into two groups based on their relative profitability (above or below the average profit rate) to examine their real estate and commercial loan activities. The bank's loan portfolio allocation (i.e., the ratio between real estate and commercial loans) is also examined to see if it has a relationship with monetary policy. The study finds evidence that monetary policy has a slightly larger negative relationship with real estate loans in banks with above average profits than with their less profitable peers. The analysis also finds evidence suggesting that commercial loan growth in low-profit banks may be more sensitive to their loan loss provisions than to monetary policy. The loan portfolio ratio shows a significant negative relationship with monetary policy and a positive relationship with provisions. The analysis reveals a positive coefficient or ‘perverse result’ between some of the commercial loan growth measures and monetary policy that may be explained by portfolio shifting at banks.