Although the importance of sectoral concentration for bank performance and stability has been discussed by economists and regulators alike, there is little empirical evidence, mostly due to lack of data. Olivier, Klaas
and I take a new and broader approach to measuring sectoral specialization: a factor-based model, where we gauge whether banks’ stock returns react to sectoral stock indices after controlling for global and domestic stock indices, a financial sector
index and the Fama-French factors. Using a return-based approach allows us to take into account that banks are over (or under) exposed to specific economic sectors not only through lending, but also through derivative positions, taken to hedge lending positions
or create sectoral exposures without lending.