Do Bank Profits Converge?

Authors


  • The authors are grateful to an anonymous referee for a number of helpful comments on a previous draft of this paper. The authors would also like to thank Roberto Violi, Francesco Cesarini, Giuseppe Zadra, Giorgio Gobbi, Barbara Casu, Franco Fiordilisi, Claudia Girardone and Andreas Hoepner. The financial support of the Istituto (formerly, Ente) Luigi Einaudi, sponsoring the research project ‘Competition in European Banking’ is gratefully acknowledged. The usual disclaimer applies.

Abstract

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. Average profitability is higher for banks that are efficient and diversified, but lower for those that are more highly capitalised. There is evidence of persistence of excess profit from one year to the next. The persistence of profit was lower in 1999–2007 than it was in 1992–98 in all eight countries. This finding is consistent with the hypothesis of an increase in the intensity of bank competition as a result of an increase in the integration of EU financial markets following the introduction of the euro in 1999, and the implementation of the Financial Services Action Plan.

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