Editorial & Advertiser disclosure

Global Banking & Finance Review® is an online platform offering news, analysis, and opinion on the latest trends, developments, and innovations in the banking and finance industry worldwide. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website.

Home > Banking > Fast Loan Growth Predicts Poor Bank Performance

Fast Loan Growth Predicts Poor Bank Performance

Published by Gbaf News

Posted on September 18, 2018

4 min read

Last updated: January 21, 2026

A serene view of Belize's lush landscapes symbolizing international banking security - Global Banking & Finance Review — An inviting image showcasing Belize's stunning scenery, representing the country's appeal as a secure haven for global investors in international banking. This visual emphasizes the stability and privacy offered by Belize's banking sector.

A bank’s core role is to accept deposits and make loans. New research by Swiss Finance Institute Professor Rüdiger Fahlenbrach from the École Polytechnique Fédérale de Lausanne, Professor Robert Prilmeier from Tulane University, and Professor René Stulzfrom the Ohio State University shows that aggressive bank loan growth predicts poor subsequent bank stock returns. Banks, equity analysts, and investors alike seem to underestimate credit risks.

A bank’s core role is to accept deposits from clients with excess liquidity and to loan the resulting money to customers with a lack of it.

Swiss Finance Institute Professor Rüdiger Fahlenbrach from the École Polytechnique Fédérale de Lausanne, Professor Robert Prilmeier from Tulane University, and Professor René Stulz from the Ohio State University investigated the loan growth and subsequent bank stock returns of US publicly listed banks between 1972 and 2004. 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 irrespective of economic cycles. For the first time, the researchers use data on the loan portfolios and loan-loss provisions of individual banks instead of data aggregated at the country level. They find that high-growth banks simultaneously have a high return-on-assets rate and low loan-loss provisions. But during the three years following the high-growth period the return-on-assets rate quickly deteriorates and loan-loss provisions increase substantially. The main explanation for this boom-and-bust cycle is that bank analysts and investors do not adequately assess credit risks and are overly optimistic about the risks of new lending opportunities. Particularly bank analysts seem to believe that bank growth is very persistent and overestimate earnings for high-growth banks relative to low-growth banks by 6 percent for a three-year horizon.

The full version of the September issue of SFI’s Practitioner Roundups is available at http://sfi.ch/system/tdf/Roundup_September18_English.pdf?file=1.

A bank’s core role is to accept deposits and make loans. New research by Swiss Finance Institute Professor Rüdiger Fahlenbrach from the École Polytechnique Fédérale de Lausanne, Professor Robert Prilmeier from Tulane University, and Professor René Stulzfrom the Ohio State University shows that aggressive bank loan growth predicts poor subsequent bank stock returns. Banks, equity analysts, and investors alike seem to underestimate credit risks.

A bank’s core role is to accept deposits from clients with excess liquidity and to loan the resulting money to customers with a lack of it.

Swiss Finance Institute Professor Rüdiger Fahlenbrach from the École Polytechnique Fédérale de Lausanne, Professor Robert Prilmeier from Tulane University, and Professor René Stulz from the Ohio State University investigated the loan growth and subsequent bank stock returns of US publicly listed banks between 1972 and 2004. 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 irrespective of economic cycles. For the first time, the researchers use data on the loan portfolios and loan-loss provisions of individual banks instead of data aggregated at the country level. They find that high-growth banks simultaneously have a high return-on-assets rate and low loan-loss provisions. But during the three years following the high-growth period the return-on-assets rate quickly deteriorates and loan-loss provisions increase substantially. The main explanation for this boom-and-bust cycle is that bank analysts and investors do not adequately assess credit risks and are overly optimistic about the risks of new lending opportunities. Particularly bank analysts seem to believe that bank growth is very persistent and overestimate earnings for high-growth banks relative to low-growth banks by 6 percent for a three-year horizon.

The full version of the September issue of SFI’s Practitioner Roundups is available at http://sfi.ch/system/tdf/Roundup_September18_English.pdf?file=1.