Do Bank Profits Converge?

This paper examines the determinants and convergence of bank profitability in eight European Union member countries, between 1992 and 2007, using a dynamic panel model. There is evidence of persistence of abnormal bank profit from one year to the next. Average profitability was higher in banks that are strongly capitalised, efficient and diversified. The persistence of EU bank profit was lower in 1999-2007 than it was in 1992-98 in six of the eight countries. This suggests there has been an increase in the intensity of competition and speed of convergence of profits towards their long-run equilibrium values. These developments are attributed to improvements in the integration of financial markets within the EU, following the introduction of the euro in 1999, and the implementation of the Financial Services Action Plan.

[1]  S.Carbó Valverde,et al.  The determinants of bank margins in European banking. , 2007 .

[2]  P. Molyneux,et al.  Examining the Relationships between Capital, Risk and Efficiency in European Banking , 2007 .

[3]  Why are Bank Profits so Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks , 1999 .

[4]  Bernhard M. Hämmerli,et al.  Financial Services Industry , 2012, Critical Infrastructure Protection.

[5]  Barbara Casu,et al.  Bank Competition, Concentration and Efficiency in the Single European Market , 2006 .

[6]  M. Arellano,et al.  Another look at the instrumental variable estimation of error-components models , 1995 .

[7]  B. Casu,et al.  Competition issues in European banking , 2009 .

[8]  John O. S. Wilson,et al.  European Banking : Efficiency, Technology and Growth , 2001 .

[9]  G. Waring,et al.  Industry Differences in the Persistence of Firm-Specific Returns , 1996 .

[10]  Dennis C. Mueller,et al.  Profits in the Long Run , 1987 .

[11]  X. Freixas,et al.  Bailing out the Banks: Reconciling Stability and Competition , 2010 .

[12]  O. D. Bandt,et al.  Competition, contestability and market structure in European banking sectors on the eve of EMU , 2000 .

[13]  John O. S. Wilson,et al.  European banking: An overview , 2007 .

[14]  M. King.  The Cost of Equity for Global Banks: A CAPM Perspective from 1990 to 2009 , 2009 .

[15]  Allen N. Berger,et al.  The Efficiency Cost of Market Power in the Banking Industry: A Test of the Quiet Life and Related Hypotheses , 1998, Review of Economics and Statistics.

[16]  Ryan Stever.  Bank Size, Credit and the Sources of Bank Market Risk , 2007 .

[17]  W. Baumol,et al.  Contestable Markets and the Theory of Industry Structure , 1982 .

[18]  J. Mossin.  EQUILIBRIUM IN A CAPITAL ASSET MARKET , 1966 .

[19]  J. Lintner.  THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS , 1965 .

[20]  W. Sharpe.  CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK* , 1964 .

[21]  X. Freixas.  DECONSTRUCTING RELATIONSHIP BANKING , 2005 .

[22]  Ross Levine,et al.  Is There a Diversification Discount in Financial Conglomerates? , 2005 .

[23]  Allen N. Berger.  The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses , 1995 .

[24]  John Brätland.  Contestable market theory as a regulatory framework: An Austrian postmortem , 2004 .

[25]  A. Mody,et al.  How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America , 2004 .

[26]  Allen N. Berger,et al.  Why are Bank Profits so Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks , 2000 .

[27]  M. Porter,et al.  The Persistence of Shocks to Profitability , 1999, Review of Economics and Statistics.

[28]  Philip Molyneux,et al.  Total factor productivity and shareholder returns in banking. , 2010 .

[29]  Franklin Allen,et al.  Financial Integration and Emu , 2005 .

[30]  Jesús Saurina,et al.  A test of the law of one price in retail banking , 2007 .

[31]  John O. S. Wilson,et al.  Competition in banking: A disequilibrium approach , 2009 .

[32]  John C. Panzar,et al.  TESTING FOR "MONOPOLY" EQUILIBRIUM* , 1987 .

[33]  P. Molyneux,et al.  The Crisis in UK Banking: Lessons for Public Policy , 2009 .

[34]  John O. S. Wilson,et al.  Developments in European Banking , 2007 .

[35]  H. Benink.  Financial Integration in Europe , 1992 .

[36]  L. Hansen.  LARGE SAMPLE PROPERTIES OF GENERALIZED METHOD OF , 1982 .

[37]  The Financial Crisis in Europe: Evolution, Policy Responses and Lessons for the Future , 2009 .

[38]  Dennis C. Mueller,et al.  Profits in the long run: Acknowledgments , 1986 .

[39]  Gregory F. Udell,et al.  Efficiency Barriers to the Consolidation of the European Financial Services Industry , 2000 .

[40]  D. Mueller.  The Persistence of Profits above the Norm , 1977 .

[41]  T. Beck,et al.  Bank Concentration and Fragility: Impact and Mechanics , 2005 .

[42]  John Goddard,et al.  Persistence of Profits for UK Manufacturing and Service Sector Firms , 1996 .

[43]  Ana Lozano-Vivas,et al.  Deregulation and Convergence of Banking: The EU Experience , 2008 .

[44]  B. Casu,et al.  Integration and efficiency convergence in EU banking markets , 2010 .

[45]  Steven Ongena,et al.  Competition and regulation in the banking sector: A review of the empirical evidence on the sources of bank rents , 2007 .

[46]  B. Casu,et al.  Bank Competition, Concentration and Efficiency in the Single European Market , 2006 .

[47]  Hairul Azlan Annuar,et al.  Foreign investors' interests and corporate tax avoidance: Evidence from an emerging economy , 2015 .

[48]  Kevin J. Stiroh,et al.  The dark side of diversification: The case of US financial holding companies , 2006 .

[49]  European Banking Integration, Ten Years After , 1996 .

[50]  K. Stiroh.  Diversification in Banking , 2014 .

[51]  A. Jacquemin,et al.  The Persistence of Profits - a European Comparison , 1988 .

[52]  Allen N. Berger,et al.  Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks , 2002 .

[53]  Philip Molyneux,et al.  Banking in the European Union , 2012 .

[54]  Mark E. Levonian.  The persistence of bank profits: what the stock market implies , 1994 .

[55]  K. Roland.  Profit persistence in large U.S. bank holding companies , 1996 .

[56]  P. Molyneux,et al.  Determinants of European bank profitability: A note , 1992 .

[57]  F. Farabullini,et al.  Does the Law of One Price Hold in Euro-Area Retail Banking? An Empirical Analysis of Interest Rate Differentials across the Monetary Union , 2012 .

[58]  P. Molyneux,et al.  The Profitability of European Banks: A Cross-Sectional and Dynamic Panel Analysis , 2004 .

[59]  R. Blundell,et al.  Initial Conditions and Moment Restrictions in Dynamic Panel Data Models , 1998 .

[60]  H. Odagiri,et al.  Does the 'persistence of profits' persist?: a study of company profits in Japan, 1964-97 , 2002 .

[61]  Dennis C. Mueller,et al.  Profits in the long run: Index , 1986 .

[62]  Loretta J. Mester,et al.  Bank Capitalization and Cost: Evidence of Scale Economies in Risk Management and Signaling , 1997, Review of Economics and Statistics.

[63]  Philip Molyneux,et al.  Competitive conditions in european banking , 1994 .

[64]  P. Molyneux,et al.  Bank Ownership and Efficiency , 2001 .

[65]  Kevin Lee,et al.  Corporate Profitability and the Dynamics of Competition in Emerging Markets: A Time Series Analysis , 2003 .

[66]  John Goddard,et al.  The persistence of profit: a new empirical interpretation , 1999 .

[67]  P. Molyneux,et al.  Dynamics of Growth and Profitability in Banking , 2004 .

[68]  Nathan Miller,et al.  Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks , 2002 .

[69]  Robert DeYoung,et al.  Noninterest Income and Financial Performance at U.S. Commercial Banks , 2004 .

[70]  Allen N. Berger.  The Relationship between Capital and Earnings in Banking. , 1995 .

[71]  P. Molyneux,et al.  The crisis in UK banking , 2009 .

[72]  European Banking Integration: Don't Put the Cart Before the Horse , 2006 .

[73]  Amine Tarazi,et al.  Bank Income Structure and Risk: An Empirical Analysis of European Banks , 2008 .