Loan growth and quality over the credit cycle

Abstract

This study investigates the intertemporal relationship between loan growth and quality using annual data from U.S. commercial banks from 1992 to 2019. Our findings reveal that banks with higher loan growth over the preceding three years incur significant subsequent loan losses. This trend is evident in both real estate loans and commercial/industrial loans. The cross-sectional rolling regressions indicate that this relationship evolves over the credit cycle. Banks that rapidly expanded their loan portfolios before the financial crisis faced higher risks and considerable loan losses. Conversely, banks that deleveraged during and after the crisis experienced lower loan losses in subsequent years.