This paper develops a new measure of comovement in the banking sector that takes into account the dynamic nature of interlinkages in the return on assets (ROA) and net chargeoffs (NCO) among different bank holding corporations by using a dynamic factor model with time-varying parameters and stochastic volatility. We find that the degree of comovement in ROA and NCO peaked during the 2008–2009 financial crisis, suggesting a significant increase in sector-wide stress. Using the least absolute shrinkage and selection operator (LASSO) methodology, we show that comovement and risk measures derived from our approach perform well when compared to other widely used measures of systemic risk in explaining real economic activity.