Plot since 1990 the return on equity of small banks (banks with assets of less than...

Plot since 1990 the return on equity of small banks (banks with assets of less than $1 billion; FRED code: US1ROE) and large banks (banks with assets of greater than $15 billion; FRED code: USG15ROE).How do you explain the long-run pattern?

Expert Solution

ROE of small banks since 1990 :

ROE of large banks since 1990 :

The ROE of small banks ranged between 10% to 13% during 1990 to 2007. After that, it declined sharply to 0% until 2010. After that, it has been rising steadily and is now around 10%

The ROE of large banks ranged between 10% to 13% during 1990 to 2007. After that, it declined sharply to 0% until 2010. After that, it has been rising steadily and is now around 10%

It can be seen that the ROE during this period has been mostly the same for both small banks and large banks. Following the recession, the ROE of both categories dropped sharply to zero, before recovering to the pre-recession levels. It can also be seen from the graph that the ROE of large banks is more volatile than the ROE of small banks. In the long-run, the ROE of small banks and large banks seems to be closely correlated. This can be explained as the close correlation between the financial health of large banks and small banks in the economy.

jeff jeffy answered 8 months ago

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