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North American Journal of Economics and Finance 68 (2023) 101990
Contents lists available at ScienceDirect
North American Journal of Economics and Finance

journal homepage: www.elsevier.com/locate/najef
Heterogeneous impact of Covid-19 on the US banking sector☆

Dennis Heitmann a, *, Mohammad Ashraful Ferdous Chowdhury b,
Mohammad Saiful Islam a
a
University of Applied Sciences Kaiserslautern, Zweibrücken, Germany
b
Interdisciplinary Research Center (IRC) for Finance and Digital Economy, KFUPM Business School, King Fahd University of Petroleum and Minerals
(KFUPM), Dhahran, Saudi Arabia
A R T I C L E I N F O A B S T R A C T
JEL Classification: This study discusses the impact of Covid-19 on important financial performance indicators and
G21 risk indicators of US banks using quarterly panel data of the 87 insured U.S.-chartered com
G01 mercial banks, covering periods from 2017 to 2021. Based on random effect and two step system
C23
GMM models, we provide strong empirical evidence of the adverse impact of the pandemic on
M4
important accounting and market-based measures and risk indicators. The presence of Covid-19
Keywords:
implies declining profitability, deteriorating cost efficiency and decreasing level 3 assets to se
Pandemic
curities ratios. It also adversely impacted key risk indicators by increasing credit risk and the risk
Financial performance
Risk indicators of regulatory capital. Using quantile regression, we have also identified heterogeneity among
US banks banks in terms of financial performance and risk indicators. The findings of the study will add
Quantile regression value in research to the existing literature and provide the newest findings to the stakeholders
who are engaged with the US banking sector.
1. Introduction
A global pandemic of the dimensions of Covid-19 has not been encountered in the modern world, considering its global death toll of
6.94 million including 1.13 million in the U.S. as of May 2023 (WHO, 2023). It initiated serious global economic impact at the end of
February 2020, rapidly spreading in the United States and Europe and uniformly affecting both small and large firms (Khetan et al.,
2022; Ahmad et al., 2021; Elnahass et al., 2021). The pandemic initially contracted global Gross Domestic Product (GDP) by as much as
4.3 percent in 2020 (UNCTAD, 2020 as cited in Khetan et al., 2022).
Especially global banking activities suffered from precautionary reactions, such as a higher withdrawal rate on the part of de
positors and reduced market funding by counterparties of financial intermediaries during Covid-19 (Sharma et al., 2020; Baldwin and
di Mauro, 2020; Barua, 2020 as cited in Elnahass et al., 2021). Moreover, banks faced the impending dangers of credit crunches
deleveraging, capital adequacy, profitability and cost efficiency, although market crashes or bank runs have not been observed
worldwide yet. Moreover, banks have been expected to have a vested interest in taking part in supporting governmental efforts against
a recession based on far-reaching economic solutions during the pandemic (Berger et al., 2021; Elnahass et al., 2021; Goodell, 2020).
Interestingly, although the pandemic’s epicentre was in Wuhan, its impact on China was substantially less severe than that of the
☆
This paper is based on the successfully completed master thesis of the third author.
* Corresponding author.
E-mail addresses: dennis.heitmann@hs-kl.de (D. Heitmann), mohammad.chowdhury@kfupm.edu.sa (M.A.F. Chowdhury), saif_kazal@yahoo.
com (M.S. Islam).
https://doi.org/10.1016/j.najef.2023.101990
Received 23 October 2022; Received in revised form 14 July 2023; Accepted 15 August 2023
Available online 16 August 2023
1062-9408/© 2023 Elsevier Inc. All rights reserved.
D. Heitmann et al. North American Journal of Economics and Finance 68 (2023) 101990
acutely affected United States, due to differences in pandemic control measures (He et al., 2021). The first Covid-19 case in the U.S. was
reported on January 20, 2020 and it spread in all states, especially through in-flight transmission (Omer et al., 2021; Asadi-Zeydabadi
et al., 2021). Consequently, the U.S. witnessed a devastating recession in February 2020 with an increase in the unemployment rate
and a significant drop of real GDP, but the recession ended in April 2020, making it the shortest in U.S. history with its duration of only
two months (Berger & Demirgüç-Kunt, 2021). Moreover, the economic damage of the pandemic in the U.S. has been estimated at US
$1.4 trillion for the period from 2020 to 2030 (Chen et al., 2021).
Turning to the US banking industry, it is unquestioned common knowledge that the global financial crisis of 2008 was triggered by
the bankruptcy of one of the largest U.S. banks, Lehman Brothers, which ultimately led to a global banking crisis (Toarna & Cojanu,
2015). For the stock markets of the U.S., Germany and Italy, the Covid-19 health crisis has already had more negative financial impact
than the global financial crisis of 2008 (Shehzad et al., 2020). To our knowledge, however, the impact of the pandemic on the insured
U.S.-chartered commercial banks has been largely overlooked, in spite of the vital role of the U.S. banking industry in the emergence of
the global financial crisis.
Since the identification of the first Covid-19 case in December 2019, increasingly discussions of regulators and experts have been
observed in the forms of reviews, perspectives, opinions and blogs. Some academic studies have focused on the impact of the outbreak
on stock markets. Rather surprisingly, however, no empirical research has been dedicated to the impact of the pandemic on the
banking performance indicators of the U.S. exclusively, considering its worldwide record death toll (WHO, 2023). To the best of our
knowledge, only a single paper authored by Elnahass et al. (2021) has been published on this topic and empirically demonstrates the
impact of the pandemic on the stability of 83 U.S. banks. However, the paper covered data of only six financial quarters from 2019 to
2020. Besides, although the paper in question applied the ordinary least squares (OLS) estimations on the afore-mentioned six quarters,
it did not sufficiently assess the heterogeneity of the impact of Covid-19 on U.S. banks. Hence, our paper aims to demonstrate the
impact of the pandemic on important financial performance and risk indicators of 87 insured U.S.-chartered commercial banks
applying better suited methods, namely random effect model, system GMM and quantile regression. In the present study, the data
considered include the most recent quarters with the aim to find answers to two research questions: Firstly: How has Covid-19 been
impacting U.S. banks? and secondly: Has Covid-19 been impacting U.S. banks homogeneously?
Our study has shown the detrimental impact of the pandemic on different financial performance measures and risk indicators, but
interestingly, its impact is heterogeneous among banks. The empirical findings of the study have provided directions for policy making,
policy implementation, strategy development and decision making of the stakeholders for both during the pandemic and post
pandemic period.
The aim of the present study is to expand the findings of the existing literatures. To begin with, a few preliminary remarks should be
made about methodology. Firstly, random effect models have been chosen to show the overall impact of the pandemic on financial
performance indicators and risk indicators of U.S. banks. Secondly, GMM estimations are useful aids to validate the results of random
effect models, as they reveal the adverse impact of the pandemic especially on profitability, cost efficiency, credit risk and regulatory
capital. Finally, and most importantly, the novelty of the study is represented by the use of quantile regression which provides bank
level data for different quantiles and demonstrates how banks behave differently in terms of accounting-based and market-based
performance indicators; and risk indicators. Furthermore, the study measures financial performance of insured U.S.-chartered com
mercial banks with consolidated assets of $ 300 million or more, ranked by consolidated assets in descending order, which will provide
criteria for determining the necessity of subsidies for larger banks from the government within the framework of the concept of “Too
Big to Fail”, in the present pandemic as has been the case in other financial crises. Thus, the present paper is intended to make
comparisons easier of the impact of a crisis like the present one with that of other financial crises, especially global financial ones.
Moreover, the study provides quantitative evidence of how the short recession period of the pandemic impacted financial performance
indicators of U.S. banks by investigating trends of bank-level data over a given time period (Appendix B), during which the economy
recovered quickly in spite of the fares of financial distress and banking crisis, a fact which was also surprising to researchers (Berger &
Demirgüç-Kunt, 2021). Finally, the findings of the study also reveal how far U.S. banks succeeded in financially performing well under
government measures during the pandemic, which will help to better assess the effectiveness or failure rate of the policies and
measures.
The outline of the paper is as follows. Section 2 presents literature review and working hypothesis. Data and methodology are
presented in section 3. Section 4 presents empirical findings. Section 5 concludes the study.
2. Related literature review
2.1. Covid-19 and the global banking sector: A short review
Uncertainty in the financial markets resulted mainly from the announcements of pandemic-related economic policies, while the
respective measures resulting from these policies remained rather unsystematic for major currencies like the USD as the currency of the
fastest recovering market (Maneejuk et al., 2022). The exchange rates of minor currencies, however, were driven by both response
policies of the U.S. and global factors (Deev & Plíhal, 2022; Beckmann & Czudaj, 2022). That being so, the yield curve of the U.S. has
been found to be the main transmitter of spillovers during the pandemic crisis (Aharon et al., 2022). The pandemic also impacted
interest rate policies in Europe, as government bond yields in more solvent and financially stable countries such as Germany and
Austria were affected by Covid-19-related fiscal and monetary policy announcements of the ECB and the European Commission.
Decisions concerning the policy rate and the way they are communicated have long-lasting effects (Fendel et al., 2021; Aslam &
Farvaque, 2022).
2
Interestingly, governments interfered with lending responses and credit performances of banks by expanding economic support and
choosing macroprudential policies in the areas of credit growth limit, reserve requirements and provisions to handle massive defaults;
and higher NPL ratios being related to international credit market imperfections during the pandemic (Park & Shin, 2021; Neef &
Schandlbauer, 2021; Yin et al., 2022; Igan et al., 2022). There has even been a significant negative effect of the pandemic on local
credit (Norden et al., 2021). Especially, credit rationed firms have had less access to funding from banks to overcome their cash flow
and liquidity problems due to delinquency on trade credit reports or other delayed payments, apart from their dependence on gov
ernment grants during the pandemic (Khan, 2022; Al-Hadi & Al-Abri, 2022; Dunz et al., 2021). Moreover, during the pandemic, the
overall banking risk in Europe was negatively impacted by an increased sovereign risk of the Eurozone as a whole (González-Velasco
et al., 2022).
Concerning policy responses, Covid-19 has significantly weakened the monetary policy transmission to banks because of gov
ernment interventions, apart from increasing costs of banks due to higher impairment charges (Wei & Han, 2021; Tan et al., 2021).
Nonetheless, deregulation with a minimized regulatory framework and the implementation of strong economic stimuli to the financial
sector based on cooperation between banks and governments seem to be more effective while at the same time less costly policy
responses to the pandemic crisis (Polyzos et al., 2021). Significantly, more responsiveness and policy measures evidenced in more
populous and richer countries belonging to a monetary union (Feyen et al., 2021). Moreover, while liquidity support and cutting policy
rates benefit less liquid banks, borrower assistance policy announcements lead to abnormally high returns for larger banks during the
pandemic (Demirgüç-Kunt & Pedraza, 2021). Finally, fewer policy measures have been taken by developing economies and emerging
markets in the case of a higher private bank credit to GDP ratio coupled with the implementation of BASEL III reforms (Feyen et al.,
2021).
2.2. Covid-19 and financial performance of US banks
At the very beginning of the Covid-19 pandemic, deposit ratios in the U.S. banking industry increased moderately while the in
dustry did not face liquidity problems. A significant decline in loan ratios, however, could suggest a decrease in credit risk (Berger &
Demirgüç-Kunt, 2021). Consequently, foreign bank subsidiaries in the U.S. increased their lending during the first half of 2020 as a
response to lower or negative home country policy rates in the U.S., while U.S. banks are exiting the Covid-19 period with a lower
capital adequacy ratio as a result of easier monetary policy conditions at home, which have stimulated U.S. activities (Spiegel, 2022).
Interestingly, U.S. community banks, especially in urban areas, significantly outperformed U.S. large banks in terms of profitability,
capital and risk-taking at the very beginning of Covid-19 pandemic, a fact that may be due to their better understanding of local
businesses and solid relationships with customers (Hassan et al., 2022). It is evident that during the pandemic, non-performing loans
increased due to the banks’ exposure to lockdown policies (Beck and Keil, 2021, as cited in Berger & Demirgüç-Kunt, 2021).
Turning to the policy responses, the U.S. Federal Reserve (Fed) faced unprecedented challenges of the Covid-19-induced recession
and corresponding financial crisis and repeated the use of instruments developed during the global financial crisis of 2007–2008,
adding explicit treasury guarantees to handle credit losses (Bordo & Duca, 2022). The Fed responded with several rounds of quan
titative easing (QE) to overcome the subprime crisis, followed by unprecedented multilateral responses to deal with the Covid-19 crisis
from a number of central banks in a short period (Cortes et al., 2022). Moreover, regulators and supervisors in the U.S. took easing
actions during the pandemic regarding regulatory accounting data by changing the method of calculating the Basel III regulatory
capital ratio in order to meet the bank requirement, thus allowing forbearance and deferred payment of certain debts having impact on
non-performing loans as well as temporarily reducing focus on examinations of banks by supervisors, which in turn can have far-
reaching consequences such as inaccurate reporting in favor of banks, a new banking crisis, financial distress as well as inflationary
fears (Berger & Demirgüç-Kunt, 2021).
It is challenging to measure the impact of the pandemic on US banking performance indicators under several lockdown measures
and other initiatives of the government and the central bank. Therefore, it can be simply assumed that the Covid-19 pandemic de
creases the accounting-based and market-based performance of U.S. banks on the one hand, while increasing their risks on the other.
This assumption leads us to the first alternative hypothesis in this study in the following form, which has been tested applying a random
effect model and the system GMM approach.
H1A: Covid-19 leads to poorer accounting-based and market-based performances - as well as risk-indicators of U.S. banks.
2.3. Covid 19 and heterogeneous impact on U.S. Banks
There is little available evidence to be found in the existing literatures that the effect of business cycle fluctuation may differ
between larger and smaller banks, such as the study of Grochulski et al. (2018), which shows that net interest margin of larger U.S.
banks and (smaller U.S. banks) are negatively (and positively) correlated with business cycle fluctuations because of the close rela
tionship of small banks with their borrowers. Moreover, between 1997 and 1999, large U.S. commercial banks were less profit efficient
than smaller ones, but since 1999, profit efficiency of large banks has declined to a lesser degree than that of small banks (Chukwuogor
& Wetmore, 2006). The study concludes that a negative economic situation coupled with deregulation results more vulnerability for
smaller banks as evidenced by the sample period from 1997 to 2002 (Chukwuogor & Wetmore, 2006). Moreover, the most recent study
of Shabir et al. (2023) on the global banking industry reveals that certain characteristics of a bank such as bank size, bank capitali
zation and bank liquidity are adversely impacted by Covid-19. Country specific studies on the heterogeneity among banks seem rare,
especially in recent years.
As our study investigates 87 insured U.S.-chartered commercial banks with assets sizes varying from 3,308,575 million USD to
3
20,360 million USD (Federal Reserve Statistical Release, 2022), it allows correlating size and capacity differences of banks with a
potential heterogeneity in their behavior during the Covid-19 crisis. Therefore, the assumption leads to the following hypothesis,
which has been examined applying quantile regression in the study:
H1B: The accounting-based and market-based performances - as well as risk-indicators of U.S. banks display heterogeneous changes
during the pandemic.
3. Data and methodology
3.1. Data and sample construction
Large banks have grown substantially in the U.S. since the Great Recession where the 15 largest U.S. banks alone hold total assets of
13.44 trillion dollars as of December 31, 2021 out of a 27.71 trillion of total assets of banks in the U.S. in 2020 (Goldberg, 2022;
Statista, 2022). Hence, as the U.S. banking sector consists of few large and many small banks, only a small number of U.S. banks can
represent the whole banking industry. Our study covers a sample of 87 insured U.S.-chartered commercial banks (including Big 4 U.S.
banks) with consolidated assets of $ 300 million or more, ranked by consolidated assets in descending order based on asset size
(Federal Reserve Statistical Release, 2022) as shown in Appendix C. The aggregate consolidated assets of all 2,123 insured U.S.-
chartered commercial banks with consolidated assets of at least $ 300 million amount to $21,619,004 million, according to the
Federal Reserve Statistical Release (2022). Nonetheless, the aggregate consolidated assets of our sample of 87 insured U.S.-chartered
commercial banks amount to $18,391,140 million (Federal Reserve Statistical Release, 2022), thus representing 85.07 percent of the
aggregate consolidated assets of all 2,123 insured U.S.-chartered commercial banks. Therefore, the sample size is well representative
for the entirety of insured U.S.-chartered commercial banks with a minimum of consolidated assets of $ 300 million.
Our study includes 20 quarters, from the 1st quarter of 2017 to the 4th quarter of 2021 for each bank as panel data, resulting in a
total of 1718 bank-quarter observations, 22 of the values being missing. Twelve quarters from 2017 to 2019 represent the pre-
pandemic period and eight quarters from 2020 to 2021 represent the pandemic period as chosen for the study. For the study,
financial data were not available on a daily or monthly basis. Therefore, quarterly data were preferred. Quarterly ratios are expressed
as percentages which were retrieved from the BankFocus database. Financial statements containing the ratios mentioned in the study
follow United States Generally Accepted Accounting Principles (U.S. GAAP) accounting standards and rules for financial reporting.
Credit Default Swap (CDS) premium data have been generated from Datastream to represent the sovereign credit risk as a macro
variable. Moreover, this study also considered Economic Policy Uncertainty (EPU) Index (Lien et al., 2022; Zhou et al., 2022; Nguyen
et al., 2020; Baker et al., 2016) as a global factor.
3.2. Methodology and model development
3.2.1. Random effect model

Empirical models have been developed to examine the evidence of the impact of Covid-19 on the financial performance of U.S.
banks. Random effect models have been used in this study to estimate the population models. Hence, generic specifications of the panel
data random effect models in this study are as follows:
AccountingPerfit = α +β1 (Covid19t ) +β2 (Debt/TA)+β3 (Cash/TA)+ β4 (LogTA)+β5 (LogAge)+β6 (LogEmp)+β7 (CDS) +β8 (EPU)+ εit
MarketPerfit = α +β1 (Covid19t )+β2 (Debt/TA)+β3 (Cash/TA)+β4 (LogTA)+β5 (LogAge)+β6 (LogEmp)+β7 (CDS)+β8 (EPU)+ εit Riskit
= α +β1 (Covid19t )+β2 (Debt/TA)+β3 (Cash/TA)+β4 (LogTA)+β5 (LogAge)+β6 (LogEmp)+β7 (CDS)+β8 (EPU)+ εit
Here, accounting-based and market-based performance indicators are represented by Accounting Perfit and Market Perfit respec
tively. Accounting-based measures include return on assets (ROA) (Zhou et al., 2021; Elnahass et al., 2021; Al-Musali & Ismail, 2014;
Ekinci & Poyraz, 2019; Maqbool & Zameer, 2018; Ghecham & Salih, 2019), return on equity (ROE) (Zhou et al., 2021; Elnahass et al.,
2021; Al-Musali & Ismail, 2014; Ekinci & Poyraz, 2019; Maqbool & Zameer, 2018; Ghecham & Salih, 2019), and cost to income ratio
(Cost/Income) (Shabir et al.,2023; Elnahass et al., 2021). Higher ROA and ROE indicate higher profitability of a bank (Elnahass et al.,
2021), but a higher cost to income ratio implies a bank’s lower cost efficiency (Abdelsalam et al., 2020, as cited in Elnahass et al.,
2021).
Market-based indicators (sensitivity to market risk) consist of the level 3 assets to securities ratio (L3A/ Securities) (Liao et al.,
2022; Lu, 2022; Hanley et al., 2018; Iselin & Nicoletti, 2017; Ayres, 2016) and the trading revenues to operating revenues ratio (TR/
OR) (Giglio et al., 2021; Ferreira et al., 2019; Haubrich & Young, 2019). The higher the value of level 3 assets to securities, the higher
the portion of most illiquid and not actively traded assets of banks compared to total securities. Moreover, the higher the value of
trading revenues to operating revenues, the higher the banḱ s revenue from securities trading compared to operating revenues.
Types of bank risk are represented by Riskit. Important risk indicators contain the impaired loans to gross customer loans and
advances ratio (IL/Loan) as a measurement for the credit risk (Shabir et al.,2023; Zhou et al., 2021; Elnahass et al., 2021; Ekinci &
Poyraz, 2019), the liquid assets to deposits and short-term funding ratio (LA/DSF) as a measurement for the liquidity risk (Elnahass
et al., 2021) and finally the capital adequacy ratio (CAR) (Zhou et al., 2021) as a measurement for the regulatory capital risk. The
higher the value of the impaired loans to gross customer loans and advances ratio, the higher the credit risk. Nonetheless, higher liquid
assets to deposits and short-term funding ratio (LA/DSF) and higher capital adequacy ratio indicate lower liquidity risk and lower
4
regulatory capital risk respectively.

As we follow Shabir et al. (2023) and Elnahass et al. (2021) in the models in this study, Covid-19 t represents a time dummy variable
which takes the value of 1 if the quarter is in the Covid-19 period which includes eight quarters from the first quarter in 2020 to the last
quarter in 2021 and 0 if it is not. Moreover, control variables have been included which potentially can have impact on bank per
formance indicators. These control variables are the total debt to total assets ratio (Debt/TA) representing bank leverage (Trinh et al.,
2020; Elnahass et al., 2021; Maqbool & Zameer, 2018), the cash to total assets (Cash/TA) ratio (Shabir et al., 2023; Elnahass et al.,
2021; Augeraud-Véron & Boungou, 2023), bank size (LogTA) (Augeraud-Véron & Boungou, 2023; Shabir et al., 2023; Ahamed et al.,
2021; Elnahass et al., 2021; Trinh et al., 2020; Al-Musali & Ismail, 2014; Maqbool & Zameer, 2018) and bank age (LogAge) (Elnahass
et al., 2021; Maqbool & Zameer, 2018). The total number of employees (LogEmp) has been taken as an additional control variable, as it
may have an impact on banking performance, especially on cost efficiency and the overall profitability of a bank. The sovereign credit
default swap (CDS) spread (Augustin et al., 2022; Turguttopbaş, 2015; Mihai & Neagu, 2011; Acharya et al., 2014) and economic
policy uncertainty index (EPU) (Fedorova et al., 2022; Umar et al., 2022; Baker et al., 2022; Elnahass et al., 2021; Boulton, 2022) have
been taken as macro variable and global factor respectively, thus serving as two additional control variables. In Appendix A, the
definitions and sources (citations) of the variables can be found.
3.2.2. System generalized method of moments (GMM)

The robustness of the random effect models has been checked using the two-step system Generalized Method of Moments (GMM) as
proposed by Arellano and Bond (1991) and Blundell and Bond (1998) to address the problems resulting from potential endogeneity,
such as time-invariant heterogeneity, reversed causality or unobserved factors threatening the validity of the results with biased es
timates (Shabir et al., 2023; Elnahass et al., 2021; Nikoloski et al., 2021). Diagnostics tests such as the autocorrelation test and the
Hansen test for instrument validity have also been performed. The study adopts the following system GMM equation as a dynamic
approach which includes the value of a lagged dependent variable to estimate the financial performances and risk indicators of U.S.
banks.
Yi,t = β1 Yi,t− 1 + β2 Covid 19 + β3 Xi,t + β4 Zi,t + μi + εi,t
Here, Yi,t is the dependent variable (accounting-based performances, market-based performances and risk indicators) for bank i in
the year t. Yi,t− 1 is the dependent variable in the year t − 1. COVID 19 denotes our main independent variable, Xi,t is a vector of
endogenous variables, and Zi,t is a vector of explanatory variables. μi is a bank specific time invariant effect which allows for het
erogeneity across banks. μi serves as a year control effect and εi,t represents an error term.
3.2.3. Quantile regression model

In order to examine the heterogeneous effects of Covid- 19 on the U.S. banking sector, this study applies the quantile regression
model (See Koenker & Bassett, 1978). The quantile regression approach includes a number of regression curves to show the re
lationships between predictor variables and specific percentiles (or “quantiles”) of a target (dependent) variable more accurately,
explicitly the relation of upper and lower quantiles for different predictor variables is an indicator of the level of heterogeneity
(Sharma, 2022).
If x is the dependent variable and y is the independent variable, β(α), α ∈ [0, 1] is interconnectedness at αth quantile and Fx (a|y) is a
distribution function, then the equation can be expressed as follows:
∑
Qx(α|y) = inf{a|Fx (a|y) ≥ α } = βk (α)Yk = yβ(α)
k
Minimization of weighted absolute deviations between x and y can result in the coefficients β(α) for given τ where 1, {xn < ynβ(α)}
denotes constant indicator function.
∑
n
β(α) = arg min (α − 1{xn <yn β(α) } )|Xn − Yn β(α) |
n=1
The following quantile regression model can be developed to examine the impact of Covid-19 on financial performances and risk
indicators of U.S. banks.
[ ]
∑ ∑
Qx(α|y) = τ(α) + βk (α)Yk + C λ(α) + θk (α)Yk
k k
C denotes a dummy variable that takes the value 1 for the Covid-19 period and otherwise 0. The parameters λ(α) and θk(α) capture
the marginal effect during the crisis period for each quantile α. The marginal effect during the pandemic period for every quantile α is
captured by λ(α) and θk(α) (Sharma, 2022). Hence, the quantile regression model captures the dependency structure that exists in the
U.S. banking industry.
3.3. Descriptive statistics
Descriptive statistics for the full sample of 87 insured U.S.-chartered commercial banks before and during the pandemic are pre
sented in Table 1. It has been found from the preliminary results of two-sample t-tests that important performance indicators of U.S.
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D. Heitmann et al.
Table 1
Descriptive statistics of the variables.
Variables N Mean SD Min Max Skewness Kurtosis Pre-Covid Mean Pre-Covid (SD) Covid Mean Covid (SD) Mean Difference Two Sided Two-Sample T-Test (two-tailed)
(p value)
ROA 1718 0.282 0.283 − 6.710 1.410 − 14.097 320.503 0.307 0.151 0.245 0.407 0.062 <0.001 4.433***
ROE 1718 2.457 2.569 − 67.810 13.910 − 14.547 366.635 2.587 1.454 2.257 3.667 0.330 0.009 2.606***
Cost/income 1717 56.427 13.397 12.020 125.69 − 0.200 1.475 55.971 13.198 57.128 13.676 − 1.158 0.080 − 1.751*
L3A/Securities 1711 1.768 3.956 0.000 32.760 4.261 21.785 2.102 4.517 1.249 2.800 0.853 <0.001 4.374***
TR/OR 1710 1.347 3.556 − 19.030 37.340 3.969 23.741 1.309 3.355 1.405 3.850 − 0.096 0.586 − 0.544
IL/Loan 1718 0.719 0.575 − 0.040 4.480 2.232 8.171 0.693 0.465 0.758 0.710 − 0.065 0.021 − 2.307**
LA/DSF 1718 29.687 16.826 2.050 105.96 1.459 2.601 26.761 16.357 34.186 16.553 7.425 − 9.151***
6
− <0.001
CAR 1718 15.319 7.804 11.090 102.60 7.656 66.598 15.117 8.433 15.630 6.718 − 0.513 0.183 − 1.332
Debt/TA 1718 7.435 6.068 0.000 34.390 1.327 1.991 8.643 6.214 5.577 5.330 3.066 <0.001 10.558***
Cash/TA 1718 5.470 7.231 0.120 57.530 3.342 14.759 4.063 6.258 7.633 8.050 − 3.570 <0.001 − 10.301***
LogTA 1718 10.701 1.414 6.860 15.140 0.832 0.720 10.600 1.446 10.857 1.351 − 0.258 <0.001 − 3.701***
LogAge 1718 4.352 0.805 2.200 5.440 − 0.827 − 0.550 – – – – – – –

LogEmp 1718 8.295 1.561 4.940 12.520 0.679 0.427 8.287 1.582 8.306 1.530 − 0.019 0.806 − 0.246
LogEPU 1718 4.985 0.300 4.570 5.650 0.691 − 0.391 4.819 0.170 5.239 0.277 − 0.420 <0.001 − 38.905***
LogCDS 1718 2.657 0.407 1.720 3.200 − 0.952 0.048 2.851 0.204 2.358 0.457 0.493 <0.001 30.48***
Covid-19 1718 0.390 0.489 0 1 0.434 − 1.814 – – – – – – –
All ratios are expressed in percent *** p < 0.01, ** p < 0.05, * p < 0.1.
banks suffer from the adverse impact of Covid-19. Declining ROA and ROE values indicate lower profitability of U.S. banks during the
pandemic. The cost efficiency of U.S. banks during the pandemic deteriorated as much as the cost to income ratio increased. Moreover,
our findings reveal that the level 3 assets to securities ratio declined from 2.102 percent to 1.249 percent. Banks were also facing higher
credit risks during the pandemic as the impaired loans to gross customer loans and advances ratio increased from 0.693 percent to
0.758 percent, although the liquidity risk declined. Possibly, access liquidity had an impact on the profitability of banks. As for control
variables, the U.S. banking sector recorded a drop in the financial leverage ratio (Debt/TA). However, the cash to total assets ratio
(Cash/TA) increased due to the pandemic. Moreover, total assets increased during the pandemic as evidenced by the increase of Log
(TA). Finally, compared to the pre-pandemic period, economic policy uncertainty (LogEPU) increased, but the sovereign default risk
(LogCDS) slightly declined during the pandemic.
A Pearson correlation matrix is displayed in Table 2 for the independent variable Covid-19 and control variables, illustrated in
Table 1 for the full sample of the afore-mentioned 87 U.S. banks. The correlation coefficients are greater than − 0.85 and <0.85, which
seems acceptable as there is no perfect multicollinearity.
4. Empirical findings
4.1. Random effect model
In order to answer the first question of the study, random effect estimations (based on the Hausman test) have been used and are
presented in Table 3, showing the impact of the pandemic on important performance indicators of U.S. banks under panel A, panel B
and panel C, respectively. Findings of the regression models evidence a significant adverse impact of the pandemic on the perfor
mances of U.S. banks.
Accounting-based important performance indicators are to be found in Table 3 (panel A), evidencing the decline of ROA in the
random effect model with statistical significance. Economically, the results imply that Covid-19 significantly reduced profitability of U.
S. banks. Similar results have been found in the study of Elnahass et al. (2021) in case of ROA of global banking sector and ROA of
banks in U.S., China and Europe. The findings are also consistent with the most recent study of Shabir et al. (2023). Similarly, Covid -19
had an adverse impact on cost efficiency of U.S. banks, as the cost to income ratio significantly increased due to the pandemic. The
result aligns with the study of Shabir et al. (2023) for the global banking sector. Additionally, the result of the cost to income ratio
supports the result that has been found for the banks in Europe, but it contradicts with the results for U.S. banks, banks in China and the
global banking sector in the study of Elnahass et al. (2021). The deviation of the results of Elnahass et al. (2021) from our findings in
the case of cost efficiency of U.S. banks can be explained, because they covered panel data of only six quarters from 2019 to 2020. With
regard to ROE, the random effect found negative but statistically insignificant impact of Covid-19.
In the case of control variables under panel A, the coefficient of total assets (LogTA) is significantly negatively associated with the
cost to income ratio (cost/income), according to the random effect model. The findings imply that larger banks have a higher cost
efficiency compared to their smaller peers. Similarly, the global banking sector also reveals that total assets are negatively associated
with the cost to income ratio, possibly due to economies of scale (Shabir et al., 2023). Furthermore, the debt to total assets ratio (Debt/
TA) has a significantly negative impact on ROA and ROE. Economically, it reveals that banks with higher leverage typically have lower
profitability compared to the banks with lower leverage. This might be due to the increase of interest expenditures for debt payments
or the decline in total assets. Moreover, the coefficient of total employees (LogEmp) has a significantly positive correlation with the
cost to income ratio, which seems economically consistent, as a higher number of employees usually requires higher operating ex
penditures of banks. With respect to macro variable and global factor, both sovereign risk (LogCDS) and economic policy uncertainty
(LogEPU) have a significant negative impact on the ROA and ROE of banks. The results reveal that both a higher sovereign risk and
higher economic policy uncertainty lead to a decline of a bank’s profitability. The findings seem economically justified, because a
higher sovereign default risk and a higher economic policy uncertainty hamper economic activities, which results in a decline of bankś
profits, especially those stemming from lending operations to borrowers.
Market-based performance indicators (panel B) demonstrate that the level 3 assets to securities ratio is significantly negatively
associated with Covid-19. The result implies that the value of most illiquid assets compared to the total securities of banks has dropped
due to Covid-19, because banks remain pessimistic about the valuation of such illiquid assets during a crisis period. Similarly, Covid-19
has a significantly negative impact on the trading revenue to operating revenue ratio, which economically reveals that a banḱ s revenue
Table 2
Pearson correlation matrix of all independent variables.
Covid-19 Debt/TA Cash/TA LogAge LogTA LogEmp LogEPU LogCDS
Covid-19 1
Debt/TA -0.247*** 1
Cash/TA 0.241*** -0.265*** 1
LogAge 0.023 -0.112*** 0.01 1
LogTA 0.089*** 0.361*** 0.022 0.081*** 1
LogEmp 0.006 0.419*** -0.205*** 0.188*** 0.835*** 1
LogEPU 0.685*** -0.104*** 0.077** 0.017 0.065*** 0.015 1
LogCDS -0.593*** 0.227*** -0.213** − 0.022 -0.071*** 0.003 -0.212*** 1
*** p < 0.01, ** p < 0.05, * p < 0.1 (2-tailed).
7
Table 3
Impact of Covid-19 pandemic on performance indicators (Random effect models).
Panel A: Accounting-based measures Panel B: Market-based measures Panel C: Risk indicators
INDEPENDENT VARIABLES ROA ROE Cost/Income L3A/Securities TR/OR IL/Loan LA/DSF CAR
Covid-19 − 0.066*** − 0.275 3.337*** − 41.830*** − 31.950* 0.159*** 3.121*** − 0.928***

(0.024) (0.215) (0.618) (15.500) (17.780) (-0.033) (-0.434) (-0.214)
LogTA − 0.006 0.226 − 9.073*** 7.057 56.030** − 0.002 14.650*** 5.172***
(0.016) (0.161) (1.006) (25.510) (23.810) (-0.049) (-0.856) (-0.421)
LogAge − 0.013 − 0.081 1.224 22.330 42.710 − 0.004 3.051** 0.840
(0.015) (0.157) (1.266) (32.410) (26.520) (-0.058) (-1.416) (-0.685)
Debt/TA − 0.004** − 0.034* 0.092 0.952 − 0.117 − 0.006* − 0.132*** − 0.114***
(0.002) (0.018) (0.060) (1.513) (1.697) (-0.003) (-0.043) (-0.021)
Cash/TA − 0.001 − 0.014 0.055 1.755 0.380 0.0002 0.501*** 0.095***
(0.001) (0.013) (0.044) (1.094) (1.235) (-0.002) (-0.031) (-0.015)
LogEmp 0.011 − 0.151 9.992*** 10.620 − 46.640** 0.104** − 9.440*** − 3.754***
(0.015) (0.152) (1.011) (25.700) (23.060) (-0.048) (-0.936) (-0.458)
LogCDS − 0.106*** − 0.827*** − 0.526 40.670*** 35.270** 0.138*** 0.284 0.676***
(0.021) (0.183) (0.518) (12.970) (14.880) (-0.027) (-0.364) (-0.180)
LogEPU − 0.127*** − 1.337*** − 0.511 3.191 31.150 − 0.106*** − 3.122*** − 0.622**
(0.031) (0.274) (0.753) (18.850) (21.910) (-0.040) (-0.519) (-0.257)
Constant 1.287*** 10.940*** 66.970*** 214.400 − 40.600 0.031 − 50.230*** − 10.580**
(0.179) (1.704) (8.854) (225.000) (207.800) (-0.426) (-8.452) (-4.118)
Observations 1,718 1,718 1,717 1,718 1,710 1,718 1,718 1,718
R-squared 0.042 0.034 0.280 0.053 0.064 0.081 0.366 0.135
Standard errors in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.
from trading operations declines compared to its operating revenue, as during the pandemic the capital market was also hampered
(O’Donnell et al., 2021).
Turning to the control variables in panel B, bank size (LogTA) is a significant positive predictor for the trading revenue to operating
revenue ratio, which implies that the larger the bank, the bigger the proportion of its revenue from trading versus its operating
revenue. The sovereign risk (LogCDS) has a significant positive impact on the level 3 assets to securities ratio (L3A/Securities) and the
trading revenue to operating revenue ratio, which interestingly reveals that the higher the default risk of governments, the higher the
valuation of most illiquid assets compared to total securities, and the higher the revenue from investments in securities of the capital
market compared to the banks’ operating revenue.
Risk indicators of banks (panel C) were also investigated in the present study, which showed that both the impaired loans to gross
customer loans and advances ratio and liquid assets to deposit and short-term funding ratio increased while the capital adequacy ratio
declined due to the Covid-19 pandemic. The result of the impaired loans to gross customer loan and advances ratio aligns with the
study of Elnahass et al. (2021) for U.S. banks and Shabir et al. (2023) for the global banking sector, which economically implies that
banks face a higher credit risk due to the pandemic. Nevertheless, the result of the liquid assets to deposit and short term funding ratio
contradicts with the study of Elnahass et al. (2021) concerning banks in the U.S. and Europe, but not for banks in China. This might be
due to the difference in the sample periods. Finally, the capital adequacy ratio of banks significantly dropped by 0.93 percent due to the
pandemic, which indicates a higher regulatory capital risk of U.S. banks.
Coefficients of control variables in panel C demonstrate that bank size (LogTA) is a significant positive predictor of both the liquid
assets to deposit and short-term funding ratio and the capital adequacy ratio, which shows that larger banks take lower liquidity risk
and regulatory capital risk. Similarly, bank age (LogAge) has been found to be a positive predictor of the liquid assets to deposit and
short term funding ratio, which means that the older the bank, the lower the liquidity risk. Inversely, bank leverage (Debt/TA) is a
negative predictor of the impaired loans to gross customer loans and advances ratio, the liquid assets to deposit and short-term funding
ratio and the capital adequacy ratio. It can be inferred from the results that the higher the bank leverage, the lower the credit risk and
the higher the liquidity risk and regulatory capital risk. Additionally, our results show that an increase of the cash to total assets ratio
leads to a higher value of the liquid assets to deposit and short-term funding and capital adequacy ratio, which is economically justified
as cash is the single most liquid asset of banks. The sovereign risk (LogCDS) has a significant positive impact on the impaired loans to
gross customer loans and advances ratio, as higher default risks of governments can hamper economic activities, which aligns with the
findings of González-Velasco et al. (2022) on banks in Europe. Similarly, the capital adequacy ratio can also increase as a result of a
higher sovereign default risk under strict regulatory capital requirement for banks. Turning to a global factor, economic policy un
certainty (LogEPU) is a significant negative predictor of all the risk indicators in the study. Economically, a bank’s lower credit risk
may be due to decreasing loan disbursement by banks as a consequence of economic uncertainty. As depositors withdraw their money
from banks and hold cash for expenditures during economic uncertainty, a higher EPU can result in a higher liquidity risk of banks.
Similarly, higher EPU also results in a higher regulatory capital risk, maybe due to decreasing capital compared to increasing risk-
weighted assets. Finally, value of R-squared in each model is demonstrating how much the outcome variable is explained by the in
dependent variable Covid-19 and the control variables.
8
4.2. Two-step system Generalized method of Moments (GMM)
This study also applied the two step system GMM while examining the impact of Covid 19 on the U.S. banking sector. The reason for
using GMM is that potential endogeneity problems can result from the causal relationship between the dependent and the independent
variables; and the problem of measurement errors and omitted variables can be reduced by system GMM estimators (Elnahass et al.,
2021). In this method, lagged values of potentially endogenous variables have been used as their instrument variables, where financial
performance indicators and risk indicators in later quarters could not be the cause of these lagged values in earlier quarters. This is
evidenced that endogeneity is very unlikely to occur in these models after transformation (Elnahass et al., 2021).
In order to test the consistency of the models, a post-estimation specification test such as the instrument validity and autocorre
lation in the models are displayed in Table 4 (panel A, B and C). The Arellano and Bond (1991) test of second order autocorrelation’s p-
value indicates that the models do not have an autocorrelation issue except TR/OR. Using xtabond2 command developed in Stata by
Roodman (2009), this study performed both the Sargan and Hansen J-statistics for testing the validity of instruments. Since Hansen J-
statistics is more robust than Sargan’s test for the two step system GMM (see Oseni, 2016), this study uses the results based on the
former. The insignificant p-value of the Hansen J-statistics in all models confirms the validity of instruments. We also followed the rule
of thumb of not exceeding the number of instruments in comparing the number of groups in all the models. Thus, based on the di
agnostics tests, we have found all models to be properly specified.
Turning to the GMM coefficients presented in Table 4 (panel A, B and C), panel A evidences that Covid-19 is significantly negatively
(and positively) associated with the accounting-based performance indicators ROA, ROE and (Cost/Income). It can be inferred from
the findings that Covid-19 pandemic results correlate with a decline in profitability and cost efficiency of U.S. banks, which also aligns
with the results of random effect models. Unlike the random effect, the GMM model of this study reveals that Covid-19 has significantly
negative impact on ROE. This result is consistent with Elnahass et al. (2021). With respect to the bank size (LogTA), it is found that
LogTA plays significantly negative role on the cost to income ratio, which reveals that the higher the bank size, the lower the cost
efficiency. Similarly, the debt to total assets ratio and the cash to total assets ratio are negative predictors of ROA, which economically
implies that both higher leverage and higher liquidity reduce the profitability of a bank. The coefficient of total employees reveals that
a higher number of bank employees results in a higher cost to income ratio, while economic policy uncertainty reduces the profitability
of a bank.
Moreover, the market-based performance indicator in Table 4 (Panel B) shows a significant negative impact of Covid-19 on the
trading revenue to operating revenue ratio, which economically implies a decline of revenues from securities trading compared to
operating revenues due to the pandemic. The coefficient of bank size reveals that the larger the bank size, the higher the trading
revenue to operating revenue ratio. Similarly, higher levels of the sovereign risk and the economic policy uncertainty result in a higher
level of the trading revenue to operating revenue ratio.
Table 4 (panel C) demonstrates that Covid − 19 has a significant positive and (negative) impact on both the impaired loans to gross
customer loans and advances ratio, the liquid assets to deposit and short term funding ratio and the capital adequacy ratio, which
economically implies that the pandemic adversely affects both credit risk and regulatory capital risk. Turning to the control variables,
it can be inferred that the larger the bank size, the lower the liquidity risk and regulatory capital risk. Similarly, the higher the bank
age, the lower the credit risk and regulatory capital risk. Finally, a higher sovereign default risk results in a lower credit risk, but a
higher liquidity risk for banks.
The results of the two-step system Generalized Method of Moments (GMM) corroborates the results of our random effect model.
Therefore, after capturing dynamic endogeneity, simultaneity and unobserved heterogeneity, our main results do not change
significantly.
4.3. Quantile regression
In order to answer our second research question, the one concerning the heterogeneous impact of Covid 19 on the U.S. banking
sector, this study adopted the panel quantile regression model. More precisely, quantile regression has been used in the study as a
dynamic model to detect any heterogeneous relationship among the 87 U.S. banks in our study in terms of the important performance
and risk indicators. The accounting-based performance measures (Table 5a and Table 5b) reveal that ROA declined more with less
profitable banks compared to highly profitable banks during the sampled period. For example, the coefficients of COVID-19 on the
accounting-based performance indicators show that the negative impact is more vivid in the lower quantiles of the distribution.
Alternatively, it can be said that the impact of Covid-19 is less prominent for profitable banks than for their counterparts. However,
Covid-19 has a significantly positive impact on ROE for two upper quantiles (Q60 and Q80), which reveals that return on equity
significantly increases for the banks with higher ROE. Turning to cost efficiency, Covid-19 has a significantly negative impact on the
banks with a lower cost to income ratio at quantile 40. Economically, it shows that highly cost-efficient banks have not been adversely
impacted by the pandemic.
Market-based performance measure (Table 5b and Table 5c) demonstrates that banks’ securities trading business to operating
revenue significantly declines for banks with a lower trading revenue to operating revenue ratio in the lower quantile (Q20) with a
negative coefficient. In other words, Covid-19 adversely impacts the banks with lower trading revenue to operating revenue ratio.
Turning to quantile regression for the key risk indicators (Table 5c and Table 5d), the results reveal that the ratio of impaired loans
to gross customer loans and advances has significantly increased only for the banks with higher credit risk in the upper quantile (Q90).
If, for example, the coefficient is positive only in a higher quantile, it can be inferred that the adverse impact of Covid-19 is more
intense for the banks with higher credit risk. Similarly, a significantly positive impact of Covid-19 is higher for banks with a lower
9
D. Heitmann et al.
Table 4
Robustness test: System GMM effects of the pandemic on performance indicators.
Panel A: Accounting-based measures Panel B: Market-based measures Panel C: Risk indicators
VARIABLES ROA ROE Cost/Income L3A/Securities TR/OR IL/Loan LA/DSF CAR
Lagged DV − 0.254*** − 0.318*** 0.119* 0.303*** − 0.180 0.297*** 0.397*** 0.318***

(0.083) (0.054) (0.065) (-0.093) (-0.185) (0.081) (0.088) (0.058)
Covid-19 − 0.150*** − 1.001*** 3.011*** − 20.680 − 47.950*** 0.227** 2.219* − 2.411***
(0.055) (0.379) (0.769) (-17.320) (-15.890) (0.0956) (1.269) (0.526)
LogTA 0.163 1.307 − 5.791*** 23.620 108.300*** 0.258 13.629** 7.079**
(0.199) (0.944) (1.505) (–22.310) (-39.870) (0.220) (5.682) (3.070)
LogAge − 0.152 − 0.685 2.542** − 4.498 43.610 − 0.899** − 3.758 2.804*
(0.106) (0.763) (1.039) (-26.450) (-28.540) (0.399) (6.928) (1.479)
Debt/TA − 0.054*** − 0.255** 0.185 0.540 − 4.748 0.003* 0.617 0.281
(0.017) (0.111) (0.142) (-2.538) (-3.452) (0.020) (0.380) (0.243)
Cash/TA − 0.014** − 0.096 0.138 1.912 1.101 − 0.034 0.503* 0.485**
10
(0.006) (0.069) (0.115) (-1.411) (-1.865) (0.039) (0.280) (0.215)

LogEmp 0.111 − 0.229 6.561*** 1.928 − 58.050* − 0.153 − 12.298** − 8.376
(0.193) (1.391) (1.478) (-19.410) (-30.620) (0.234) (5.621) (3.433)**
LogCDS 0.023 − 0.147 0.754 26.600** 34.550** − 0.049*** − 2.095* − 0.341
(0.039) (0.221) (0.602) (-12.220) (-14.260) (0.070) (1.229) (0.488)
LogEPU − 0.052 − 0.557** − 1.417* 4.691 45.640** − 0.128 − 1.134 0.627

(0.039) (0.280) (0.828) (-15.200) (-21.210) (0.086) (1.215) (0.502)
Constant − 0.935 − 0.268 46.887 55.170 − 427.400* 3.769* − 6.337 − 13.658
(1.218) (7.065) (11.742) (-199.500) (–233.400) (2.141) (26.61) (9.473)
Observations 1,628 1,628 1,625 1,628 1,618 1,626 1,626 1,626
No. of instruments 31 36 44 43 43 38 37 39
No. of groups 87 87 87 87 87 87 87 87
Arellano-Bond: AR(1) 0.040 0.064 0.000 0.000 0.108 0.000 0.000 0.010
Arellano-Bond: AR(2) 0.057 0.131 0.964 0.446 0.027 0.423 0.125 0.216
Hansen test (p-val) 0.095 0.082 0.049 0.236 0.371 0.324 0.278 0.173
Standard errors in brackets * p < 0.1, ** p < 0.05, *** p < 0.01.
D. Heitmann et al.
Table 5a
Quantile regression for performance indicators.
(Q20) (Q40) (Q60) (Q80) (Q90) (Q20) (Q40) (Q60) (Q80) (Q90)
VARIABLES ROA ROA ROA ROA ROA ROE ROE ROE ROE ROE
lag_DV 0.196*** 0.202*** 0.169*** 0.188*** 0.084*** 0.572*** 0.712*** 0.706*** 0.604*** 0.469***
(0.013) (0.009) (0.010) (0.019) (0.029) (0.014) (0.007) (0.008) (0.017) (0.032)
Covid-19 − 0.086*** − 0.079*** − 0.070*** − 0.050** − 0.007 − 0.175 0.087 0.194*** 0.347** 0.368
(0.014) (0.009) (0.011) (0.019) (0.030) (0.129) (0.065) (0.075) (0.154) (0.292)
LogTA − 0.004 0.002 − 0.002 − 0.005 0.001 0.099** 0.009*** 0.117*** 0.156*** 0.117
(0.005) (0.004) (0.004) (0.008) (0.011) (0.049) (0.025) (0.028) (0.058) (0.111)
LogAge − 0.012** − 0.014*** − 0.018*** − 0.025*** − 0.039*** − 0.064 − 0.041* − 0.003 − 0.082 − 0.152
(0.005) (0.003) (0.004) (0.007) (0.011) (0.046) (0.023) (0.027) (0.054) (0.103)
Debt/TA − 0.004*** − 0.004*** − 0.003*** − 0.000 0.010*** − 0.017** − 0.009*** − 0.003 0.017** 0.061***
11
(0.001) (0.001) (0.001) (0.001) (0.002) (0.007) (0.003) (0.004) (0.008) (0.016)
Cash/TA − 0.004*** − 0.002*** − 0.001*** 0.0002 0.002 − 0.025*** − 0.018*** − 0.015*** − 0.008 − 0.001
(0.001) (0.000) (0.000) (0.001) (0.001) (0.006) (0.003) (0.003) (0.007) (0.013)
LogEmp 0.001 − 0.001 0.001 0.004 − 0.011 − 0.099** − 0.071*** − 0.119*** − 0.163*** − 0.188*
(0.005) (0.003) (0.004) (0.007) (0.010) (0.046) (0.023) (0.027) (0.055) (0.105)
LogCDS − 0.057*** − 0.041*** − 0.028* − 0.0210 − 0.049 − 0.758*** − 0.304*** − 0.257*** − 0.307 − 0.255

(0.018) (0.013) (0.014) (0.026) (0.039) (0.170) (0.086) (0.098) (0.202) (0.384)
LogEPU − 0.117*** − 0.101*** − 0.096*** − 0.088*** − 0.092*** − 0.524*** − 0.073 0.026 0.159 0.136
(0.012) (0.008) (0.009) (0.017) (0.027) (0.115) (0.058) (0.067) (0.137) (0.261)
Constant 0.921*** 0.801*** 0.799*** 0.811*** 1.085*** 6.019*** 2.257*** 1.888*** 2.573** 3.865**
(0.089) (0.062) (0.070) (0.130) (0.198) (0.855) (0.431) (0.496) (1.017) (1.934)
Observations 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717

*** p < 0.01, ** p < 0.05, * p < 0.1.
D. Heitmann et al.
Table 5b
(Q20) (Q40) (Q60) (Q80) (Q90) (Q20) (Q40) (Q60) (Q80) (Q90)
VARIABLES Cost/Income Cost/Income Cost/Income Cost/Income Cost/Income L3A/Securities L3A/Securities L3A/Securities L3A/Securities L3A/Securities
lag_DV 0.725*** 0.847*** 0.897*** 0.876*** 0.846*** 0.981*** 0.997*** 0.996*** 0.979*** 0.920***
(0.019) (0.011) (0.011) (0.018) (0.044) (0.008) (0.002) (0.001) (0.008) (0.032)
Covid-19 − 1.160 − 1.057** − 0.283 0.544 2.318 − 6.308 − 0.221 − 0.0003 6.583 32.840
(0.768) (0.446) (0.448) (0.741) (1.810) (8.348) (1.810) (0.977) (8.105) (32.780)
LogTA − 1.982*** − 1.276*** − 0.706*** − 0.917*** − 1.627** − 0.315 − 0.792 0.160 3.857 6.971
(0.317) (0.184) (0.185) (0.306) (0.747) (3.176) (0.689) (0.372) (3.083) (12.470)
LogAge 0.491* 0.257 0.457*** 0.688*** 0.838 5.881** 1.359** 0.0139 − 1.987 − 4.955
(0.276) (0.160) (0.161) (0.266) (0.650) (2.958) (0.641) (0.346) (2.871) (11.610)
Debt/TA − 0.013 0.054** 0.047* 0.069* 0.128 − 0.121 0.014 − 0.019 − 0.766* − 1.536
12
(0.041) (0.024) (0.024) (0.039) (0.097) (0.444) (0.096) (0.052) (0.431) (1.744)
Cash/TA − 0.030 0.026 0.051*** 0.137*** 0.166** − 0.184 0.015 − 0.003 − 0.044 0.077
(0.033) (0.019) (0.019) (0.032) (0.079) (0.357) (0.078) (0.042) (0.347) (1.403)
LogEmp 2.552*** 1.482*** 0.751*** 0.948*** 1.480** − 0.865 − 0.019 0.058 2.746 5.260
(0.311) (0.180) (0.181) (0.299) (0.731) (3.010) (0.653) (0.352) (2.922) (11.820)
LogCDS 0.744 1.869*** 1.558*** 2.009** 1.440 − 1.242 − 0.253 − 0.213 − 6.151 − 36.700

(1.010) (0.586) (0.588) (0.974) (2.379) (10.980) (2.382) (1.286) (10.660) (43.120)
LogEPU − 2.137*** − 1.493*** − 0.557 0.778 3.233** − 2.330 0.394 0.200 17.790** 79.040***
(0.674) (0.391) (0.393) (0.650) (1.587) (7.329) (1.589) (0.858) (7.115) (28.780)
Constant 11.870** 2.068 − 1.074 − 4.087 − 1.784 − 9.659 2.583 1.275 − 39.550 − 15.080
(5.129) (2.974) (2.987) (4.945) (12.080) (54.710) (11.860) (6.403) (53.110) (214.80)
Observations 1,715 1,715 1,715 1,715 1,715 1,717 1,717 1,717 1,717 1,717

*** p < 0.01, ** p < 0.05, * p < 0.1.
D. Heitmann et al.
Table 5c
(Q20) (Q40) (Q60) (Q80) (Q90) (Q20) (Q40) (Q60) (Q80) (Q90)
VARIABLES TR/OR TR/OR TR/OR TR/OR TR/OR IL/Loan IL/Loan IL/Loan IL/Loan IL/Loan
lag_DV 0.796*** 0.915*** 0.863*** 0.619*** 0.389*** 0.862*** 0.928*** 0.968*** 1.020*** 1.028***
(0.029) (0.008) (0.009) (0.030) (0.043) (0.008) (0.004) (0.005) (0.011) (0.029)
Covid-19 − 61.480** − 8.774 − 1.325 15.580 40.170 − 0.018 − 0.012 − 0.004 0.023 0.114**
(28.930) (7.773) (8.751) (29.420) (41.280) (0.015) (0.009) (0.011) (0.021) (0.057)
LogTA 0.809 − 0.887 2.811 54.550*** 90.510*** 0.006 − 0.001 0.001 0.002 − 0.001
(11.170) (3.003) (3.381) (11.370) (15.950) (0.006) (0.003) (0.004) (0.008) (0.022)
LogAge − 16.470 − 1.575 0.952 35.320*** 49.010*** 0.008 0.005 − 0.003 − 0.014* − 0.026
(10.280) (2.763) (3.111) (10.460) (14.670) (0.005) (0.003) (0.004) (0.007) (0.020)
Debt/TA − 0.728 − 0.255 0.230 4.307*** 4.642** 0.001 0.001** 0.001** 0.001 0.0006
13
(1.543) (0.415) (0.467) (1.570) (2.202) (0.001) (0.000) (0.001) (0.001) (0.003)
Cash/TA 2.141* 0.134 − 0.053 − 0.223 − 1.462 0.0004 0.0004 0.001 − 0.0002 0.0008
(1.235) (0.332) (0.374) (1.256) (1.762) (0.001) (0.000) (0.000) (0.001) (0.002)
LogEmp − 5.857 − 1.556 − 0.103 − 26.830** − 50.850*** 0.003 0.004 − 0.001 − 0.009 − 0.005
(10.450) (2.808) (3.161) (10.630) (14.910) (0.005) (0.003) (0.004) (0.008) (0.021)
LogCDS 31.910 6.657 1.122 23.240 21.820 0.031 0.042*** 0.048*** 0.066** 0.062

(38.000) (10.210) (11.500) (38.650) (54.220) (0.019) (0.011) (0.014) (0.028) (0.075)
LogEPU − 18.010 2.942 0.112 44.730* 68.130* − 0.003 0.014* 0.026*** 0.067*** 0.206***
(25.360) (6.814) (7.670) (25.790) (36.180) (0.013) (0.008) (0.009) (0.019) (0.050)
Constant 45.070 40.200 51.850 − 443.400** − 486.800* − 0.271*** − 0.275*** − 0.289*** − 0.352** − 0.601
(189.60) (50.950) (57.360) (192.90) (270.60) (0.099) (0.056) (0.071) (0.138) (0.374)
Observations 1,708 1,708 1,708 1,708 1,708 1,717 1,717 1,717 1,717 1,717

*** p < 0.01, ** p < 0.05, * p < 0.1.
D. Heitmann et al.
Table 5d
(Q20) (Q40) (Q60) (Q80) (Q90) (Q20) (Q40) (Q60) (Q80) (Q90)
VARIABLES LA/DSF LA/DSF LA/DSF LA/DSF LA/DSF CAR CAR CAR CAR CAR
lag_DV 0.914*** 0.947*** 0.963*** 0.973*** 0.966*** 0.905*** 0.957*** 1.001*** 1.021*** 1.038***
(0.009) (0.005) (0.005) (0.006) (0.017) (0.003) (0.003) (0.002) (0.003) (0.007)
Covid-19 − 0.216 0.414* 1.120*** 1.663*** 1.891** 0.168** 0.219*** 0.222*** 0.283*** 0.459***
(0.464) (0.226) (0.228) (0.311) (0.830) (0.067) (0.061) (0.048) (0.067) (0.160)
LogTA 0.176 0.044 − 0.089 − 0.144 − 0.232 0.020 0.010 − 0.029 − 0.005 0.012
(0.186) (0.091) (0.091) (0.124) (0.332) (0.026) (0.023) (0.018) (0.025) (0.061)
LogAge 0.151 0.069 − 0.052 − 0.081 0.116 0.018 − 0.014 − 0.014 − 0.022 − 0.019
(0.165) (0.081) (0.081) (0.111) (0.296) (0.024) (0.022) (0.017) (0.024) (0.057)
Debt/TA − 0.008 0.004 0.016 0.057*** 0.135*** − 0.006* − 0.006* − 0.001 0.003 0.015*
14
(0.025) (0.012) (0.012) (0.017) (0.044) (0.004) (0.003) (0.003) (0.004) (0.009)
Cash/TA 0.130*** 0.134*** 0.163*** 0.238*** 0.316*** 0.004 0.006* 0.013*** 0.021*** 0.041***
(0.022) (0.011) (0.011) (0.015) (0.039) (0.003) (0.003) (0.002) (0.003) (0.008)
LogEmp 0.208 0.136* 0.252*** 0.224** 0.231 0.014 0.012 0.028 − 0.014 − 0.068
(0.168) (0.082) (0.082) (0.112) (0.301) (0.024) (0.022) (0.018) (0.024) (0.058)
LogCDS 1.243** 0.731** 0.955*** 1.359*** 2.445** − 0.076 − 0.066 − 0.008 − 0.053 − 0.295

(0.612) (0.298) (0.300) (0.410) (1.095) (0.088) (0.080) (0.063) (0.087) (0.210)
LogEPU − 0.946** − 0.328* 0.284 0.585** 1.330* 0.196*** 0.283*** 0.327*** 0.447*** 0.700***
(0.407) (0.199) (0.200) (0.273) (0.729) (0.059) (0.054) (0.042) (0.058) (0.140)
Constant − 7.507** − 4.230*** − 5.930*** − 7.703*** − 14.47*** 0.437 − 0.0929 − 0.706** − 0.826* − 0.233
(3.044) (1.485) (1.495) (2.039) (5.449) (0.439) (0.401) (0.316) (0.435) (1.045)
Observations 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717 1,717

*** p < 0.01, ** p < 0.05, * p < 0.1.
liquidity risk, as the coefficient values of the ratio liquid assets to deposit and short-term funding is lower in the lower quantile
compared to the upper quantile. More precisely, COVID-19 decreases the liquidity risk more for banks for which the liquidity risk is
already lower compared to banks with a higher liquidity risk. Turning to the regulatory capital risk, banks with a lower capital ad
equacy ratio have been more adversely impacted by Covid-19 compared to the highly capitalized banks, as the coefficient of the capital
adequacy ratio is lower in lower quantiles, but higher in upper quantiles. In other words, banks with higher regulatory capital risk have
been more adversely impacted by Covid-19 than their counterparts.
Turning to the control variables, it can be inferred that the significant negative impacts of both the sovereign risk and economic
policy uncertainty are higher for the banks with lower profitability compared to the banks with higher profitability. Similarly, both of
these two variables have a significant positive impact on credit risk, but the impact is higher for the banks with higher credit risk
compared to the banks with lower credit risk. Moreover, the significant positive impact of economic policy uncertainty is more
pronounced for banks with a higher capital adequacy ratio compared to banks with a lower one.
4.4. Discussion
U.S. banks are familiar with the usual type of financial crisis which is typically caused by the banking industry itself. Covid-19,
however, suddenly came as an infectious disease that created perplexing scenarios for banks, especially after the announcement of
government initiatives to save lives or the economy, which, however, often adversely impacted the profitability, cost efficiency,
valuation of illiquid assets, ratio of trading revenue to operating revenue, ratio of impaired loans and capital adequacy. With their
existing policies developed to overcome the usual type of a global financial crisis, banks were not prepared for such an unprecedented
environment. Moreover, government interventions with the consequence of an expansionary monetary policy, aimed at saving the
economy, resulted in more flexibility for borrowers due to declining interest rates. Lower interest rates, on the one hand, reduced the
income of banks. A liquidity trap, on the other hand, characterized by higher savings despite low interest rates instead of the expected
higher investments, is evidenced in our study by the decline of profitability ratios and an increase of the liquidity ratio. This problem of
a global savings glut results the modern tendency of economic agents, even during negative real rates, to save rather than to invest
(Kirik & Ulusoy, 2022). Moreover, impaired loans of banks also increased due to several lockdowns and disruptions in business op
erations of the borrowers, which also increased the costs of banks due to loan provisioning and write-offs, a fact shown by an increase
in credit risk and a decline in cost efficiency. Our study reveals that the ratio of level 3 assets to securities declined, which can be
explained by a tendency of banks to become less optimistic in their estimation of the value of level 3 assets during the pandemic.
Finally, we also found that banks behaved differently in terms of financial performance measures and risk indicators. Covid-19
impacted banks heterogeneously. The existence of better and worse performing banks in the sample of this study may be due to
the differences in the banks’ capacity to handle the pandemic crisis.
5. Conclusions and policy implications
The U.S. banking sector is well associated with the banking sectors of many other countries in the world and cannot be considered
in isolation. This study is particularly interesting as it not only observes the impact of Covid-19 on the U.S. banking sector, but also the
heterogeneity among banks to find answers to the questions raised from the challenges discussed in ongoing debates among stake
holders, a major one being the IMF, regarding the implications of Covid-19 for the U.S. banking sector and the future of the sector as a
whole.
The study reveals that Covid-19 harmed the accounting-based key performance indicators with declining profitability of banks and
deteriorating cost efficiency. The pandemic harmed market-based key performance indicators decreasing the ratio of level 3 assets to
securities and the ratio of trading revenue to operating revenue. Moreover, it also adversely impacted key risk indicators by increasing
credit risk and regulatory capital risk. These results of the application of random effect models are consistent with the GMM esti
mations. More specifically, quantile regression implies heterogeneous relationships among banks as different banks behave differently
in terms of accounting-based measures, market-based measures and risk indicators.
Hence, while random effect models and GMM estimations might represent the overall performance of U.S. banks, the application of
the quantile regression method yields more detailed information. The results of the study validate the expectations of the authors of the
paper and corroborate the alternative hypothesis developed as the point of departure of the study. Although we applied the quarterly
data up to the end of 2021 to add value to existing research literatures in the form of new findings, future research in this area must be
conducted taking a few more recent quarters of the pandemic and more banks into consideration.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper.
15
Appendix A:. Variable definitions and source
Variables Definitions Source (citation)
Return on Assets (ROA) Net income divided by total assets expressed as a percentage. It Zhou et al. (2021), Elnahass et al. (2021), Al-Musali and Ismail
indicates profitability of a bank’s assets. (2014), Ekinci and Poyraz (2019), Maqbool and Zameer
(2018), Ghecham and Salih (2019)
Return on Equity (ROE) Net income divided by total equity expressed as a percentage. It Zhou et al. (2021), Elnahass et al. (2021), Al-Musali and Ismail
indicates profitability of a bank’s equity. (2014), Ekinci and Poyraz (2019), Maqbool and Zameer
(2018), Ghecham and Salih (2019)
Cost to Income (Cost/ Cost divided by income expressed as a percentage. It indicates Shabir et al. (2023), Elnahass et al. (2021)
Income) the efficient functioning of bank.
Level 3 Assets to Securities Level 3 assets consist of mortgage-backed securities, foreign BankFocus, Liao et al. (2022), Lu (2022), Hanley et al. (2018),
(L3A/Securities) stocks, complex derivatives, private equity shares and Iselin and Nicoletti (2017), Ayres (2016)
distressed debt which are most illiquid and not actively traded.
Level 3 assets have been divided by total securities of the bank
and expressed as a percentage.
Trading revenues to Banḱ s revenue from securities trading business scaled by BankFocus, Giglio et al. (2021), Ferreira et al. (2019),
operating revenues (TR/ revenue from banḱ s main operation and expressed as a Haubrich and Young (2019)
OR) percentage.
Impaired Loans to Gross Impaired loans are unlikely to be repaid with full contractual Shabir et al. (2023), Zhou et al. (2021), Elnahass et al. (2021),
Customer Loans and principal and interest. Outstanding impaired loans have been Ekinci and Poyraz (2019)
Advances (IL/Loan) scaled by total outstanding loans and expressed as a
percentage. Higher value of IL/Loan indicates higher credit risk
and vice versa.
Liquid Assets to Deposits and Liquid assets have been divided by deposits and short-term Elnahass et al. (2021)
Short-term Funding (LA/ funding and expressed as a percentage.
DSF)
Capital Adequacy Ratio CAR measures how much capital a bank has available as a Zhou et al. (2021)
(CAR) percentage of risk-weighted credit exposures and it is expressed
as a percentage.
Covid-19 Dummy (Covid-19) Represents value of 1 in the quarters of 2020 and 2021 as Shabir et al. (2023) and Elnahass et al. (2021)
Covid-19 period, and 0 otherwise when quarters are not in
Covid-19 period.
Bank Size (LogTA) Total assets of bank in the natural logarithm form. Augeraud-Véron and Boungou (2023),Shabir et al. (2023),
Ahamed et al. (2021), Elnahass et al. (2021), Trinh et al.
(2020), Al-Musali and Ismail (2014), Maqbool and Zameer
(2018)
Bank Age (LogAge) Age of bank in years in the natural logarithm form. Elnahass et al. (2021), Maqbool and Zameer (2018)
Bank Leverage (Debt/TA) Total debt divided by total assets and expressed as a percentage Trinh et al. (2020), Elnahass et al. (2021), Maqbool and
that indicates the degree of a bank’s debt to finance its assets. Zameer (2018)
Cash to Total Assets (Cash/ Cash and cash equivalent divided by total assets and expressed Shabir et al. (2023), Elnahass et al. (2021), Augeraud-Véron
TA) as a percentage that indicates the portion of a bank’s assets and Boungou (2023)
made up of cash and cash equivalent.
Total Employees (LogEmp) Total number of employees of a bank in the natural logarithm BankFocus
form.
Sovereign risk (LogCDS) Sovereign Credit Default Swap (CDS) spread (premium) against Augustin et al. (2022), Turguttopbaş (2015), Mihai and Neagu
sovereign default risk. (2011), Acharya et al. (2014), Datastream
Economic policy uncertainty Economic policy uncertainty index has been constructed from EPU, Fedorova et al. (2022), Umar et al. (2022), Baker et al.
(LogEPU) three types of components as search results from 10 large (2022), Elnahass et al. (2021), Boulton (2022),
newspapers, reports by the Congressional Budget Office and
professional forecasterś survey by the Federal Reserve Bank of
Philadelphia.
16
Appendix B:. Average of bank performances by quarterly periods
Source: Authors’ estimation.
17
Appendix C:. Consolidated assets (USD in million) of the sample of the study in descending order
Source: Federal Reserve Statistical Release (2022).
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North American Journal of Economics and Finance 68 (2023) 101990

Contents lists available at ScienceDirect

North American Journal of Economics and Finance

Heterogeneous impact of Covid-19 on the US banking sector☆

2. Related literature review

2.1. Covid-19 and the global banking sector: A short review

2.2. Covid-19 and financial performance of US banks

2.3. Covid 19 and heterogeneous impact on U.S. Banks

3. Data and methodology

3.1. Data and sample construction

3.2. Methodology and model development

3.2.1. Random effect model

regulatory capital risk respectively.

3.2.2. System generalized method of moments (GMM)

3.2.3. Quantile regression model

3.3. Descriptive statistics

North American Journal of Economics and Finance 68 (2023) 101990

4.1. Random effect model

*** p < 0.01, ** p < 0.05, * p < 0.1 (2-tailed).

Covid-19 − 0.066*** − 0.275 3.337*** − 41.830*** − 31.950* 0.159*** 3.121*** − 0.928***

Standard errors in parentheses.

4.2. Two-step system Generalized method of Moments (GMM)

4.3. Quantile regression

VARIABLES ROA ROE Cost/Income L3A/Securities TR/OR IL/Loan LA/DSF CAR

Lagged DV − 0.254*** − 0.318*** 0.119* 0.303*** − 0.180 0.297*** 0.397*** 0.318***

(0.006) (0.069) (0.115) (-1.411) (-1.865) (0.039) (0.280) (0.215)

North American Journal of Economics and Finance 68 (2023) 101990

North American Journal of Economics and Finance 68 (2023) 101990

Standard errors in parentheses.

North American Journal of Economics and Finance 68 (2023) 101990

Standard errors in parentheses.

North American Journal of Economics and Finance 68 (2023) 101990

Standard errors in parentheses.

North American Journal of Economics and Finance 68 (2023) 101990

Standard errors in parentheses.

5. Conclusions and policy implications

Declaration of Competing Interest

Appendix A:. Variable definitions and source

Variables Definitions Source (citation)

Appendix B:. Average of bank performances by quarterly periods

Source: Authors’ estimation.

Source: Federal Reserve Statistical Release (2022).

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* p < 0.01, p < 0.05, * p < 0.1 (2-tailed).

Covid-19 − 0.066* − 0.275 3.337* − 41.830*** − 31.950* 0.159* 3.121* − 0.928***

Lagged DV − 0.254* − 0.318* 0.119* 0.303* − 0.180 0.297* 0.397* 0.318*