Measures of Bank Performance, Liquidity Risk and Their Relationship with Farm Income Volatility

Abstract

The objective of this paper is to analyze the impact of farm-level risk on bank performance in the state of North Dakota. Farm-level risk has been quantified into a single measure of the volatility of net farm income. Bank performance was examined through two profitability ratios, ROE and ROA, as well as a measure of liquidity risk, the financing gap ratio. Using random effects regression model, relationships between performance measures and bankspecific, agricultural and macroeconomic variables were examined. Panel data from banks and farms in North Dakota for the years 2005-2014 were included. Each type of variable showed significance to performance ratios indicating meaningful relationships with internal factors and macroeconomic factors alike. Results also showed that variability in business operations of bank financed companies is also relevant to bank performance. Continued risk management within financial institutions is vital to maintaining or increasing performance.