Managing Credit Risk in Small and Large U.S. Banks: Indicators from the 2007-2013 Financial Crises

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Author	Pooran Lall
ISSN	2307-2466
On Pages	154-165
Volume No.	4
Issue No.	4
Issue Date	October 01, 2020
Publishing Date	October 01, 2020
Keywords	US banks, U.S. small banks, bank size, community bank, credit risk.

Abstract

Credit risk is the dominant risk problem faced by the U.S. banking industry. Understanding how credit risk responds to bank specific, market related and macroeconomic/location related variables in small and large banks in the U.S can help formulate more specific strategies to manage credit risk. Results, for the Period, 2007-2013, obtained using the generalized least square, indicate that credit risk had a negative correlation with the profitability (ROA, ROE), capitalization risk, market competition (Mkt1), diversification (Dvr) and macroeconomic (GDP/Capita) variables, but a positive correlation with interest rate risk in both small banks and large banks. Except for the capitalization risk variable, the correlation coefficient for each variable considered was stronger in large banks compared with small banks, suggesting that, at the industry level, strategies aimed at improving the relationships between credit risk and these variables are likely to have a stronger impact on improving credit risk in large banks. Credit risk appeared to be greater in the Chicago and San Francisco regions compared with other regions. The coefficient of determination (R-squared) was lower in small banks compared with large banks (about 35% vs 75 %), suggesting that additional information needs to be considered in order to better explain credit risk in small banks.

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