Prof. Fahlenbrach - SFI Practitioner Roundup
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The core role of a bank is to accept deposits from agents with excess liquidity and loan the resulting capital to agents with a lack of it. For these services, banks pay their creditors and charge their debtors. The remuneration for these services depends on macroeconomic factors, such as the real risk-free rate and expected inflation, as well as investment specific factors, such as liquidity, default risk, and maturity.
If a bank overprices its lending activities, it will likely relinquish opportunities to a competitor. Reversely, if a bank underprices its loans, it will likely not be remunerated for the risk it is bearing.
SFI Professor Rüdiger Fahlenbrach, together with fellow researchers Robert Prilmeier, Tulane University, and René Stulz, The Ohio State University, investigate the loan growth and subsequent financial returns of US publicly listed banks between 1972 and 2014 in their paper "Why Does Fast Loan Growth Predict Poor Performance for Banks?", which was recently published in the Review of Financial Studies. Their empirical results show that banks that grow quickly make loans that perform worse than the loans of other banks in the three years following the high-growth period and that these results hold independently of economic cycles. Further results reveal that investors and equity analysts do not fully anticipate the poorer performance of banks after periods of high growth.