DETERMINANTS OF BANK PROFITABILITY IN THE SOUTH EASTERN EUROPEAN REGION

The aim of this study is to examine the profitability behaviour of bank-specific, industry-related and macroeconomic determinants, using an unbalanced panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of liquidity, all bank-specific determinants significantly affect bank profitability in the anticipated way. A key result is that the effect of concentration is positive, which provides evidence in support of the structure-conduct-performance hypothesis, even though some ambiguity arises given its interrelationship with the efficient-structure hypothesis. In contrast, a positive relationship between banking reform and profitability was not identified, whilst the picture regarding the macroeconomic determinants is mixed. The paper concludes with some remarks on the practicality and implementability of the findings.

European Banking Industry: Sources of Income and Profitability

THE EU banking systems are facing major changes in the form of increased competition, concentration and restructuring. These changes are triggered by a number of factors including technological change, financial liberalisation and internationalisation. The circulation of the single currency is expected to reinforce these trends. Although the banking industry is in a state of flux, it is possible to discern some overall patterns in the actions and strategies of individual banks. The effects of these responses are mainly reflected in changes in the structure of bank income and, in particular, in the increasing incidence of non-interest income. The analysis of the shift towards noninterest income provides key information for evaluating the extent to which this process could affect banks’ profitability. Profits have become the driving force in market economies. Many banks are keenly interested in earning maximum profits to provide the highest possible return to their shareholders and secure additional funds to support long-term growth. As the EU banking industry continuously evolves, changes in industry composition and the macroeconomic environment have a direct impact on the aggregate performance of the industry. If banks’ profitability becomes more volatile, banking is more risky unless the level of profitability raises substantially. So, there is a clear connection between profitability volatility and banking stability; a high level of profitability volatility is a source of instability in the banking system, augmenting the possibility of bank failures. A move to more interest rate sensitive assets like securities and to off-balance sheet instruments, along with more prone to default assets, like consumption credit, may increase the profitability’s volatility and so the stability and soundness of the banking system. The changes in the banks’ income structure and the determinants of profitability deriving from developments in the banking business will have clear implications on the activity of banking supervision

Assessing Output and Productivity Growth in the Banking Industry

This paper assesses the evolution of output and productivity in the Greek banking industry for the period 1990-2006. Three main categories of bank output were estimated based on modern theoretical approaches, while for the aggregation and estimation of output and inputs and the estimation of productivity (partial and total factor) we relied on the index number method (Tornqvist index). Additionally, we considered the effect of labor quality on banks’ productivity and using a growth accounting framework we examined the contribution of total factor productivity (TFP) to bank output growth. The results show that bank output and labor productivity increased considerably during the period under examination, outpacing the respective GDP growth and labor productivity of the Greek economy. Capital productivity and TFP of the Greek banking industry have also improved remarkably mainly since 1999, as a result of the structural changes that took place within the industry, capital investments (mainly in IT equipment) as well as improvement in the quality of human capital.Bank output; user-cost approach; total factor productivity; Tornqvist index; growth accounting; labor quality

The Determinants Of European Bank Profitability

The rate of return earned by a financial institution is affected by numerous factors. These factors include elements internal to each financial institution and several important external forces shaping earnings performance. The type of explanation would determine possible policy implications and ought to be taken seriously. This paper reviews the literature on bank performance studies and classifies the bank profitability determinants. The second part of the paper quantifies how internal determinants (“within effects” changes) and external factors (“dynamic reallocation” effects) contribute to the performance of the EU banking industry as a whole in 1994-1998. We construct OLS and fixed effects models, and the results provide a new perspective for understanding the impact of changes in competition on the performance of the EU banking industry. The estimation results suggest that the profitability of European banks is influenced not only by factors related to their management decisions but also to changes in the external macroeconomic environment. The results are in contrast to studies that have examined the structure-performance relationship for European banking and find a positive effect of the concentration and/or market share variables on bank profitability

Evaluating cost and profit efficiency: a comparison of parametric and nonparametric methodologies

The objective of this article is 2-fold. First, it provides an empirical assessment of the cost and profit stochastic frontiers based on a panel dataset of Greek commercial banks over the period 1993 to 2005. Second, on the basis of the same sample, it also compares the most widely used parametric and nonparametric techniques to cost efficiency measurement, namely, the Stochastic Frontier Approach and Data EnvelopmentAnalysis. The results suggest greater similarities between the predictions of cost and profit efficiency methods than between parametric and nonparametric techniques. Such evidence is new in the literature and calls for a more technically level playing field for estimating bank efficiency.Bank cost and profit efficiency; Parametric and non-parametric methods

Assessing output and productivity growth in the banking industry

This paper assesses the evolution of output and productivity in the Greek banking industry for the period 1990-2006. Three main categories of bank output were estimated based on modern theoretical approaches, while for the aggregation and estimation of output and inputs and the estimation of productivity (partial and total factor) we relied on the index number method (Tornqvist index). Additionally, we considered the effect of labor quality on banks’ productivity and using a growth accounting framework we examined the contribution of total factor productivity (TFP) to bank output growth. The results show that bank output and labor productivity increased considerably during the period under examination, outpacing the respective GDP growth and labor productivity of the Greek economy. Capital productivity and TFP of the Greek banking industry have also improved remarkably mainly since 1999, as a result of the structural changes that took place within the industry, capital investments (mainly in IT equipment) as well as improvement in the quality of human capital

Assessing output and productivity growth in the banking industry

This paper assesses the evolution of output and productivity in the Greek banking industry for the period 1990-2006. Three main categories of bank output were estimated based on modern theoretical approaches, while for the aggregation and estimation of output and inputs and the estimation of productivity (partial and total factor) we relied on the index number method (Tornqvist index). Additionally, we considered the effect of labor quality on banks’ productivity and using a growth accounting framework we examined the contribution of total factor productivity (TFP) to bank output growth. The results show that bank output and labor productivity increased considerably during the period under examination, outpacing the respective GDP growth and labor productivity of the Greek economy. Capital productivity and TFP of the Greek banking industry have also improved remarkably mainly since 1999, as a result of the structural changes that took place within the industry, capital investments (mainly in IT equipment) as well as improvement in the quality of human capital

DETERMINANTS OF BANK PROFITABILITY IN THE SOUTH EASTERN EUROPEAN REGION

The aim of this study is to examine the profitability behaviour of bank-specific, industry-related and macroeconomic determinants, using an unbalanced panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of liquidity, all bank-specific determinants significantly affect bank profitability in the anticipated way. A key result is that the effect of concentration is positive, which provides evidence in support of the structure-conduct-performance hypothesis, even though some ambiguity arises given its interrelationship with the efficient-structure hypothesis. In contrast, a positive relationship between banking reform and profitability was not identified, whilst the picture regarding the macroeconomic determinants is mixed. The paper concludes with some remarks on the practicality and implementability of the findings

DETERMINANTS OF BANK PROFITABILITY IN THE SOUTH EASTERN EUROPEAN REGION

The aim of this study is to examine the profitability behaviour of bank-specific, industry-related and macroeconomic determinants, using an unbalanced panel dataset of South Eastern European (SEE) credit institutions over the period 1998-2002. The estimation results indicate that, with the exception of liquidity, all bank-specific determinants significantly affect bank profitability in the anticipated way. A key result is that the effect of concentration is positive, which provides evidence in support of the structure-conduct-performance hypothesis, even though some ambiguity arises given its interrelationship with the efficient-structure hypothesis. In contrast, a positive relationship between banking reform and profitability was not identified, whilst the picture regarding the macroeconomic determinants is mixed. The paper concludes with some remarks on the practicality and implementability of the findings