Loan Delinquencies and Bank Stock Returns

Abstract

This paper examines the statistical relationship between bank stock returns and two fundamental banking variables: (1) changes in net interest margin (NIM), and (2) changes in the loan delinquency rate. Motivated by passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, as well as the significant loan problems witnessed during 2007-09, we examine two separate time periods. For the period following passage of GLBA, bank stock returns are positively related to NIM changes, and negatively related to delinquency changes. But for the pre-2000 period, these statistically significant relationships disappear.