Ba n g or Bu s i n e s s S ch ool

Work i n g P a pe r

BBS WP /1 0 /0 0 2
THE P ER S IS TEN CE OF BAN K P R OF IT
By
J oh n Godda rd, Hon g Li u , Ph i l Mol y n e u x
Di v i s i on of F i n a n ci a l S t u di e s
Ba n g or Bu s i n e s s S ch ool
and
J oh n O.S . Wi l s on
S ch ool of Ma n a g e m e n t , Un i v e rs i t y of S t An dre w s
F e bru a ry 2 0 1 0

Ba n g or Bu s i n e s s S ch ool
Ba n g or Un i v e rs i t y
He n Gol e g
Col l e g e R oa d
Ba n g or
Gw y n e dd LL5 7 2 DG
Un i t e d Ki n g dom
Te l : +4 4 (0 ) 1 2 4 8 3 8 2 2 7 7
E-m a i l : bu s i n e s s @ba n g or.a c.u k

Th e pe rs i s t e n ce of ba n k profi t

Abs t ra ct
Th is p a p er ex a m in es t h e s t r en g t h of com p et it ion in 6 5 n a t ion a l ba n k in g in d u s t r ies .
Cou n t r y -level d y n a m ic p a n el es t im a t es of t h e p er s is t en ce of ba n k p r ofit a r e r ep or t ed a n d
com p a r ed . Th e p er s is t en ce of ba n k p r ofit a p p ea r s t o be w ea k er for ba n k s in d evelop in g
cou n t r ies t h a n for t h os e in d evelop ed cou n t r ies . P er s is t en ce is r ela t ively h ig h in N or t h
Am er ica a n d Wes t er n E u r op e a n d r ela t ively low in E a s t As ia , t h e P a cific a n d Su b -Sa h a r a n
Afr ica . Th e p er s is t en ce of p r ofit is s t r on g er w h en en t r y ba r r ier s a r e h ig h , a n d w h en
com p et it ion is low a ccor d in g t o bot h s t r u ct u r e- a n d con d u ct -ba s ed com p et it ion in d ica t or s .

K ey w or d s : Ba n k in g , com p et it ion , d y n a m ic p a n el es t im a t ion , en t r y , p r ofit a bilit y ,

p er s is t en ce

J E L: G2 1 L1 1

Special thanks to Barbara Casu, Francesco Cesarini, Franco Fiordelisi, Claudia Girardone, Roberto Violi and Giuseppe Zadra for detailed
comments on the paper. Also thanks to participants at the ABI Einaudi Workshop on European Bank Competition held at ABI Piazza del
gesu 49, 18 September 20009, Rome. All errors and omissions as usual rest with the authors. The financial support of the Istituto (formerly,
Ente) Luigi Einaudi, sponsoring the research project Competition in European Banking is gratefully acknowledged

Th e pe rs i s t e n ce of ba n k profi t

1 . In t rodu ct i on

Th e com p et it ive la n d s ca p e of ba n k in g h a s been t r a n s for m ed over t h e p a s t t h r ee

d eca d es by for ces s u ch a s d er eg u la t ion , t ech n olog ica l ch a n g e a n d t h e g loba liza t ion of g ood s
a n d fin a n cia l m a r k et s . Th es e d evelop m en t s h a ve im p a ct ed u p on t h e op er a t ion s , efficien cy ,
p r od u ct ivit y , m a r g in s a n d p r ofit a bilit y of ba n k s in a ll cou n t r ies (Dem ir g u c -K u n t a n d
H u iza n g a , 1 9 9 8 ; Cla es s en s et a l., 1 9 9 8 ; Levin e, 2 0 0 3 ; Cla r k e et a l., 2 0 0 3 ; Ca r bo a n d
2

F er n a n d ez, 2 0 0 7 ; Ma u d os a n d F er n a n a d ez d e Gu eva r a , 2 0 0 4 ; 2 0 0 7 ; Ber g er , 2 0 0 7 ) . Ba n k s

n ow a d a y s op er a t e in p r od u ct a n d g eog r a p h ica l m a r k et s ver y d iffer en t fr om t h os e t h a t
ex is t ed t h ir t y y ea r s a g o. Ba n k s u s e a r a n g e of con ven t ion a l a n d in n ova t ive t ech n olog ies t o
s er ve t h eir cu s t om er s .
To d a t e, m os t a ca d em ic r es ea r ch on com p et it ion a n d it s effect s on ba n k p er for m a n ce
is ba s ed on t h eor et ica l m od els t h a t a r e s t a t ic in n a t u r e (Cla es s en s a n d La even , 2 0 0 4 ; Sh a ffer
2 0 0 4 ; God d a r d a n d Wils on , 2 0 0 9 ; Dick a n d H a n n a n , 2 0 0 9 ). St a t ic m od els a r e u s efu l in
id en t ify in g ca u s a l r ela t ion s h ip s bet w een k ey va r ia bles w h en m a r k et s a r e in eq u ilibr iu m ,
bu t t h ey p r ovid e on ly a s n a p s h ot p ict u r e of a d y n a m ic com p et it ive p r oces s (Ger os k i, 1 9 9 0 ).
Th er e is n o cer t a in t y t h a t con d u ct or p er for m a n ce m ea s u r es obs er ved a t a n y p oin t in t im e
r ep r es en t eq u ilibr iu m va lu es . F or ex a m p le, a n em p ir i ca l a s s ocia t ion bet w een h ig h
con cen t r a t ion a n d h ig h p r ofit a bilit y (im p licit in SCP -ba s ed m od els ) m a y s im p ly a p p ea r by
ch a n ce, fr om obs er va t ion s t a k en d u r in g a p er iod w h en t h e r eleva n t m a r k et is in a s t a t e of
d is eq u ilibr iu m . If s o, cr os s -s ect ion a l d a t a d oes n ot ca p t u r e (u n les s by lu ck ) t h e lon g -r u n
eq u ilibr iu m r ela t ion s h ip . F u r t h er m or e, cr os s -s ect ion a l d a t a u s u a lly d oes n ot con t a in
s u fficien t in for m a t ion on w h ich t o ba s e r elia ble p olicy d ecis ion s t o p r om ot e com p et it ive

Ber g er et a l. (1 9 9 5 ) a n d J on es a n d Cr itch field (2 0 05 ) p r ovide a n ex h a u s t ive a n a lys is of s tr u ct u r a l a n d s tr a teg ic

ch an g e in US ba n k in g . God d ar d et a l. (2 0 0 7 ) p r ovide a n over view of E u r op ean ba n k in g . DeYou n g et a l. (2 0 0 4 ) a n d
Ber g er et a l. (2 0 0 4 ) a n a lyze t h e r es p on s e of ba n k s t o ch a n g es in t h eir com pet it ive en vir on m en t . Va n der Ven n et
(2 0 0 2 ), St ir oh a n d Str a h an (2 00 3 ) a n d Ma u d os a n d F er n an dez d e Gu evar a (2 0 0 4) a s s es s th e im p a ct of t h es e
ch an g es on ba n k per for m an ce. Cet or elli (2 0 0 4 ) ex a m in es t h e effect of ba n k com pet it ion on th e s ize d is tr ibu t ion of
n on -fin an cia l fir m s . Beck et a l. (2 0 0 4 ) a n d Cet or elli a n d Str a h a n (2 0 0 6 ) a n a lys e t h e effect of ba n k com p et it ion on
t h e a va ila bilit y of cr ed it t o s m all, m ed iu m a n d la r g e fir m s . Bla ck a n d St r ah a n (2 00 2 ), Bon a ccor s i Di P a t t a a n d
DellAr icca (2 0 0 4 ) a n d Za r u t s k ie (2 0 0 3 ) as s es s t h e im p lica t ion s for bor r ow in g , in ves t m en t , en tr epr en eu r s h ip a n d
n ew fir m cr ea t ion .

ou t com es . An a bn or m a l or m on op oly p r ofi t r ea lized in on e p er iod cou ld d is a p p ea r in t h e

n ex t , r en d er in g in t er ven t ion by g over n m en t or ot h er r eg u la t or y a g en cies u n n eces s a r y .
Th is p a p er u s es a s im p le d y n a m ic m od el of t h e com p et it ive p r oces s t o t es t t h e
h y p ot h es is t h a t en t r y a n d ex it a r e s u fficien t ly fr ee t o elim in a t e a n y a bn or m a l p r ofit
q u ick ly , s o t h a t ba n k p r ofit r a t es con ver g e r a p id ly t ow a r d s t h eir lon g -r u n eq u ilibr iu m
va lu es . Th e a lt er n a t ive h y p ot h es is is t h a t t h e s t r u ct u r a l ch a r a ct er is t ics of ba n k in g m a r k et s
in p a r t icu la r cou n t r ies , or s p ecia lis t k n ow led g e or r eg u la t or y a d va n t a g es en joy ed by
in cu m ben t ba n k s , r es u lt s in en t r y bein g r et a r d ed or block ed . Th e s low er is t h e s p eed of
a d ju s t m en t , t h e lon g er is t h e p er iod over w h ich a bn or m a l p r ofit s m a y p er s is t , a n d t h e
g r ea t er is t h e ex t en t of t h e p ot en t ia l d ep a r t u r e fr om t h e com p et it ive id ea l.
Th is p a p er t es t s for t h e p er s is t en ce of p r ofit s u s in g ba n k -level d a t a fr om 6 5
cou n t r ies . Gen er a lis ed Met h od s of Mom en t s (GMM) es t im a t ion of a fir s t -or d er
a u t or eg r es s ive m od el for n or m a lized p r ofit r a t es y ield s es t im a t es for t h e p er s is t en ce of
p r ofit a t cou n t r y level. Th es e es t im a t es in d ica t e t h a t t h e p er s is t en ce of ba n k p r ofit is h ig h er
in d evelop ed cou n t r ies t h a n it is in d evelop in g cou n t r ies . F a ct or s t h a t in flu en ce t h e d eg r ee
of p er s is t en ce a r e ex a m in ed in a s econ d -s t a g e a n a ly s is . P er s is t en ce a p p ea r s t o be s t r on g er
for ba n k s loca t ed in cou n t r ies w it h h ig h en t r y ba r r ier s , a n d low levels of com p et it ion ba s ed
on s t a t ic m ea s u r es .
Th e r em a in d er of t h e p a p er is s t r u ct u r ed a s follow s . Sect ion II r eview s t h e
t h eor et ica l a n d em p ir ica l lit er a t u r e on t h e p er s is t en ce of p r ofit . Sect ion III d es cr ibes t h e
m od el s p ecifica t ion . Sect ion IV p r es en t s es t im a t es of p er s is t en ce for a s a m p le of ba n k s
d r a w n fr om 6 5 cou n t r ies . Sect ion V ex a m in es t h e d et er m in a n t s of t h e p er s is t en ce of p r ofit .
Sect ion VI con clu d es .

2 . Li t e ra t u re

Th e p er s is t en ce of p r ofit a p p r oa ch is ba s ed on em p ir ica l in ves t ig a t ion of t h e

d y n a m ics of r m -level p r o t s . Th is con s t it u t es a d ep a r t u r e fr om t h e s t a t ic, cr os s -s ect ion a l

m et h od olog y t h a t is p r eva len t in m u ch of t h e lit er a t u r e ba s ed on t h e s t r u ct u r e con d u ct

p er for m a n ce p a r a d ig m (SCP ) a n d t h e N ew In d u s t r ia l Or g a n iza t ion (N E IO) lit er a t u r e.

In it s s t r on g es t for m , t h e p er s is t en ce of p r ofit h y p ot h es is d evelop ed by Mu eller

(1 9 7 7 , 1 9 8 6 ) con s is t s of t w o con d it ion s . F ir s t , en t r y a n d ex it a r e s u fficien t ly fr ee t o
elim in a t e a n y fir m s a bn or m a l p r ofit q u ick ly . Secon d , a ll fir m s p r ofit r a t es t en d t o
con ver g e t ow a r d s a n id en t ica l lon g -r u n a ver a g e va lu e. Th e s econ d con d it ion is s t r on g er
t h a n t h e fir s t ; a n d u n d er a les s r es t r ict ive ver s ion of t h e p er s is t en ce of p r ofit s h y p ot h es is ,
a bn or m a l p r ofit r a t es d is s ip a t e q u ick ly a n d con ver g en ce of p r ofit r a t es is t ow a r d s lon g -r u n
a ver a g e va lu es t h a t m a y d iffer bet w een fir m s . Th e em p ir ica l a n a ly s is in t h is p a p er
con cen t r a t es u p on t h is la t t er for m u la t ion of t h e p er s is t en ce of p r ofit h y p ot h es is . Th e
a lt er n a t ive h y p ot h es is is t h a t s om e in cu m ben t fir m s en joy r eg u la t or y p r ot ec t ion , or p os s es s
t h e ca p a bilit y t o p r even t im it a t ion or block en t r y . If s o, a bn or m a l p r ofit t en d s t o p er s is t
fr om y ea r t o y ea r , a n d con ver g en ce is eit h er s low or , in t h e m os t ex t r em e ca s e, n on ex is t en t .
A n u m ber of s t u d ies h a ve t es t ed t h e p er s is t en ce of p r ofit s h y p ot h es is for t h e (n on ba n k ) m a n u fa ct u r in g a n d s er vices s ect or s (Mu eller ; 1 9 8 6 ; Ger os k i a n d J a cq u em in , 1 9 8 8 ;
Wa r in g , 1 9 9 6 God d a r d a n d Wils on , 1 9 9 6 , 1 9 9 9 ; McGa h a n a n d P or t er , 1 9 9 9 ; Glen et a l.,
2 0 0 1 , 2 0 0 3 ; Ma r a y u m a a n d Od a g ir i 2 0 0 2 ). Th is lit er a t u r e t y p ica lly obs er ves p a t t er n s in t h e
t im e-s er ies va r ia t ion of fir m -level p r ofit r a t e d a t a , a n d d r a w s in fer en ces a bou t t h e n a t u r e of
com p et it ion (w h et h er ba r r ier s t o en t r y ex is t , a n d if s o, w h et h er t h ey a r e t em p or a r y or
p er m a n en t ). Mos t s t u d ies r ep or t a n a ve r a g e p er s is t en ce of p r ofit es t im a t e, in t h e for m of a
fir s t -or d er a u t or eg r es s ive coefficien t in a t im e-s er ies r eg r es s ion of fir m -level n or m a lized
4

p r ofit r a t es , in t h e r a n g e 0 .4 t o 0 .5 . Som e s t u d ies r ep or t eit h er low er or h ig h er va lu es . Th e

p er s is t en ce of p r ofit h a s been fou n d t o be low er in d evelop in g cou n t r ies t h a n in d evelop ed
cou n t r ies . Th is p a t t er n is a t t r ibu t ed t o low er s u n k cos t s of en t r y , fa s t er econ om ic g r ow t h ,
t h e r ole of g over n m en t , a n d t h e p r es en ce of la r g e con g lom er a t e fir m s in d evelop in g

F or a n over view , s ee Ber g er (19 9 5 ), Ber g er et a l. (2 0 0 4 ), Dick a n d H a n n a n (2 0 09 ), God d a r d et a l. (2 0 0 1 , 2 0 0 4 b),

Cla es s en s a n d La even (20 0 4 ), Sh a ffer (2 00 4 ).
4

God d a r d a n d Wils on (1 99 9 ) an d Lipczy n s k i et a l. (2 0 0 9 ) r eview eviden ce on t h e p er s is ten ce of p r ofit in

m a n u fact u r in g a n d s er vices .

cou n t r ies w h ich t en d t o in cr ea s e t h e in t en s it y of com p et it ion ex p er ien ced by d om es t ic fir m s

(Glen et a l., 2 0 0 1 ; St ep h a n a n d Ts a p in , 2 0 0 8 ).
5

Th e evid en ce for t h e p er s is t en ce of p r ofit in ba n k in g is r ela t ively s ca n t . Us in g a

s a m p le of la r g e US ba n k s obs er ved over t h e p er iod 1 9 8 6 -9 1 , Levon ia n (1 9 9 3 ) fin d s t h a t
d es p it e r es t r a in t s on com p et it ion im p os ed by ba n k r eg u la t ion , a bn or m a l p r ofit s t en d t o be
t em p or a r y , r a t h er t h a n p er m a n en t . Th e p a ce of con ver g en ce, h ow ever , is s low er t h a n t h a t
s u g g es t ed by m os t m a n u fa ct u r in g s t u d ies . R ola n d (1 9 9 7 ) ex a m in es t h e p er s is t en ce of
p r ofit s of US ba n k h old in g com p a n ies , u s in g q u a r t er ly d a t a for t h e p er iod 1 9 8 6 -9 2 . Th e
p er s is t en ce of p r ofit is s t r on g er for ba n k s w it h below -a ver a g e p er for m a n ce. Ber g er et a l.
(2 0 0 0 ) u s e a n on -p a r a m et r ic m et h od olog y t o ex a m in e t h e p er s is t en ce of ba n k p r ofit . Th e
s t r en g t h of p er s is t en ce is fou n d t o d iffer bet w een ba n k s in it ia lly loca t ed in t h e t op a n d
bot t om d eciles of t h e d is t r ibu t ion of ba n k s by p er for m a n ce.
God d a r d et a l. (2 0 0 4 a ) es t im a t e t h e p er s is t e n ce of p r ofit for a s a m p le of E u r op ea n
ba n k s fr om s ix cou n t r ies , u s in g a m od el t h a t in cor p or a t es ba n k -s p ecific va r ia bles in clu d in g
s ize, d iver s ifica t ion , r is k a n d ow n er s h ip t y p e. Th e p er s is t en ce of p r ofit is h ig h er for m u t u a l
(s a vin g s a n d coop er a t ive) ba n k s t h a n for com m er cia l ba n k s . By cou n t r y , p er s is t en ce is
h ig h es t for F r a n ce, w h er e a s t r on g r eg u la t or y t r a d it ion m a y h a ve in s u la t ed ba n k s fr om t h e
fu ll r ig ou r s of com p et it ion .
Sever a l r ecen t s t u d ies focu s on in d ivid u a l cou n t r ies . Ag os t t in o et a l. (2 0 0 5 ) r ep or t
es t im a t es of t h e p er s is t en ce of p r ofit for It a lia n ba n k s for t h e p er iod 1 9 9 7 -2 0 0 0 . P er s is t en ce
is p os it ively a s s ocia t ed w it h ow n er s h ip con cen t r a t ion . K n a p p et a l. (2 0 0 6 ) r ep or t
p er s is t en ce es t im a t es for a s a m p le of US ba n k s , s u g g es t in g t h a t p r ofit s t a k e a s lon g a s five
y ea r s t o con ver g e t ow a r d s a ver a g e in d u s t r y n or m s . P er s is t en ce es t im a t es for Tu r k ey a n d
Gr eece a r e r ep or t ed by Bek t a s (2 0 0 7 ) a n d At h a n a s og lou et a l. (2 0 0 8 ), r es p ect ively . In a
r ecen t cr os s -cou n t r y s t u d y for Su b-Sa h a r a n Afr ica , F la m in i (2 0 0 9 ) fin d s t h a t s t r on g
p er s is t en ce is a s s ocia t ed p os it ively w it h ba n k s ize, d iver s ifica t ion a n d p r iva t e ow n er s h ip .
Over a ll, t h e em p ir ica l evid en ce t o d a t e focu s es on a r ela t ively s m a ll n u m ber of
cou n t r ies , a n d id en t ifies p os it ive a u t ocor r ela t ion in ba n k p r ofit r a t es obs er ved over t im e.
5

St ir oh a n d Str a h an (2 0 03 ) t es t t h e effect iven es s of d er eg u la tion in im p r ovin g th e com pet it ive p r oces s .

Der eg u la t ion in cr eas es bot h en t r y a n d ex it , a n d r ea lloca tes m a r k et s h a r e fr om u n pr ofit a ble ba n k s t o p r ofit a ble
ba n k s .

Th e p er s is t en ce of ba n k p r ofit is d r iven by ba n k -s p ecific a n d in d u s t r y ch a r a ct er is t ics , a n d

m a cr oecon om ic con d it ion s . Su r p r is in g ly , t h er e is lit t le evid en ce on t h e ex t en t t o w h ich
ba n k r eg u la t ion a n d s u p er vis ion d et er m in e d if fer en ces in t h e p er s is t en ce of p r ofit bet w een
cou n t r ies . A p r in cip a l object ive of t h is p a p er is t o fill t h is g a p in t h e lit er a t u r e.

3 . Me t h ods

Th is s ect ion d es cr ibes t h e em p ir ica l m et h od s u s ed in t h is p a p er . A t w o -s t a g e

a p p r oa ch is u s ed t o m ea s u r e t h e p er s is t en ce of p r ofit , a n d in ves t ig a t e t h e fa ct or s t h a t
d et er m in e t h e p er s is t en ce of p r ofit . At t h e fir s t s t a g e, d y n a m ic p a n el fir s t -or d er
a u t or eg r es s ive m od els a r e es t im a t ed for t h e n or m a lized p r ofit r a t es of ba n k s in ea ch of t h e
6 5 cou n t r ies . At t h e s econ d s t a g e, t h e fir s t -or d er a u t or eg r es s ive coefficien t s obt a in ed a t t h e
fir s t s t a g e a r e u s ed a s t h e d ep en d en t va r ia ble in a cr os s -s ect ion a l r eg r es s ion for t h e
d et er m in a n t s of t h e p er s is t en ce of p r ofit in ea ch cou n t r y .

S t ag e 1

E s t im at in g t h e p er s is t en ce of p r of it

In or d er t o elim in a t e t h e effect of cy clica l flu ct u a t ion s w h ich im p a ct s im ila r ly on t h e

p r ofit r a t es of a ll of t h e ba n k s w it h in ea ch cou n t r y , i,t is ex p r es s ed a s a d evia t ion fr om t h e
cr os s -s ect ion a l m ea n p r ofit r a t e in y ea r t . Th er efor e i,t is t h e n or m a lized p r ofit r a t e of ba n k
i in y ea r t . In t h e t h eor et ica l m od el, t h e ch a n g e in t h e n or m a lized p r ofit r a t e of ba n k i
bet w een y ea r t 1 a n d y ea r t , d en ot ed i,t , is a s s u m ed t o be a fu n ct ion of ba n k is la g g ed
n or m a lized p r ofit r a t e; t h e com p on en t of cu r r en t a n d p a s t en t r y w h ich im p a ct s d ir ect ly on
ba n k is p r ofit a bilit y , d en ot ed E i,t k for k =0 ... ; a n d a n id ios y n cr a t ic com p on en t , d en ot ed u i,t :

i,t = i +

j,k E i ,t k + u i,t

(1 )

k 0

In (1 ), t h e coefficien t s j,k , w h ich m ea s u r e t h e im p a ct of E i,t k on i,t , a r e a s s u m ed t o be t h e

s a m e for a ll ba n k s t h a t a r e loca t ed in cou n t r y j. E n t r y is a s s u m ed t o be a fu n ct ion of p a s t
r ea liza t ion s of ba n k is n or m a lized p r ofit r a t e:

E i,t = + j,k i , t k + e i,t

(2 )

k 1

Su bs t it u t in g (2 ) in t o (1 ) a n d r e-p a r a m et er izin g y ield s a n a u t or eg r es s ive m od el for ba n k is

n or m a lized p r ofit r a t e:

i,t =

~
i j,k i , t k v i , t

(3 )

k 1

Wh en em p loy in g p a n el d a t a w it h a s h or t t im e-d im en s ion , it is con ven ien t t o es t im a t e a

fir s t -or d er a u t or eg r es s ive (AR (1 )) s p ecifica t ion for i,t , w it h t h e h ig h er -or d er la g g ed p r ofit
r a t es s u p p r es s ed :

i,t ~
i j i,t 1 v i,t

In (4 ),

(4 )

~
i d en ot es ba n k is lon g -r u n m ea n n or m a lized p r ofit r a t e, a n d j in (4 ) r ep la ces j,1 in

(3 ). Th e a d ju s t m en t of n or m a lized ba n k p r ofit r a t es d es cr ibed by (4 ) is in t er p r et ed a s a

con s eq u en ce of t h e in t er a ct ion bet w een p r ofit a bilit y a n d t h e en t r y t h r ea t , a s p os t u la t ed in
t h e con t es t a ble m a r k et s lit er a t u r e (Ba u m ol et a l., 1 9 8 2 ; Br a t la n d , 2 0 0 4 ).

E s t im a t ion of t h e p er s is t en ce of p r ofit coefficien t s , j in (4 ), is im p lem en t ed u s in g Ar ella n o

a n d Bover s (1 9 9 5 ) s y s t em GMM es t im a t or , in clu d in g bot h la g g ed d iffer en ces a n d levels of
t h e ex p la n a t or y va r ia bles a s in s t r u m en t s . Th e s y s t em GMM es t im a t or r ed u ces p ot en t ia l
bia s es in fin it e s a m p les , a n d a s y m p t ot ic im p r ecis ion a s s ocia t ed w it h Ar ella n o a n d Bon d s
(1 9 9 1 ) d iffer en ced GMM es t im a t or (Blu n d ell a n d Bon d , 1 9 9 8 ). Th e con s is t en cy of t h e
s y s t em GMM es t im a t or d ep en d s bot h on t h e va lid it y of t h e a s s u m p t ion t h a t t h e er r or t er m

is n ot a u t ocor r ela t ed , a n d on t h e va lid it y of t h e in s t r u m en t s . Tw o s p ecifica t ion t es t s a r e

r ep or t ed . Th e fir s t is t h e H a n s en (1 9 8 2 ) t es t , w h ich is com m on ly u s ed a s a s t a n d a r d t es t of
6

in s t r u m en t va lid it y . It ca n a ls o be view ed a s a t es t of s t r u ct u r a l s p ecifica t ion (R ood m a n ,

2 0 0 6 , 2 0 0 8 ). Om it t in g im p or t a n t ex p la n a t or y va r ia bles , for ex a m p le, cou ld m ove
com p on en t s of va r ia t ion in t o t h e er r or t er m a n d m a k e t h em cor r ela t ed w it h t h e
in s t r u m en t s , m a k in g t h e m od el s p ecifica t ion s er iou s ly bia s ed . Th e s econ d t e s t ex a m in es t h e
h y p ot h es is of n o a u t ocor r ela t ion in t h e er r or t er m . Th e p r es en ce of fir s t -or d er
a u t ocor r ela t ion in t h e d iffer en ced r es id u a ls d oes n ot im p ly t h a t t h e es t im a t es a r e
in con s is t en t , bu t t h e p r es en ce of s econ d -or d er a u t ocor r ela t ion im p lies t h a t t h e es t im a t es a r e
in con s is t en t . Th e s econ d -or d er a u t ocor r ela t ion t es t is r ep or t ed .

S t ag e 2 In v es t ig at in g t h e d et er m in an t s of t h e p er s is t en ce of p r of it

At s t a g e 2 , t h e d et er m in a n t s of va r ia t ion s in t h e cou n t r y -level p er s is t en ce of p r ofit

coefficien t s a r e ex a m in ed . Th e es t im a t ed j obt a in ed fr om s t a g e 1 a r e t h e d ep en d en t va r ia ble
in a r eg r es s ion in w h ich cou n t r y a n d ba n k in g s ect or ch a r a ct er is t ics a r e t h e in d ep en d en t
va r ia bles . Th e in d ep en d en t va r ia bles a r e g r ou p ed in t o t h e follow in g fou r ca t eg or ies :
m a cr oecon om ic a n d fin a n cia l s y s t em ; r eg u la t or y ; in s t it u t ion a l a n d ex t er n a l g over n a n ce;
a n d m a r k et s t r u ct u r e a n d com p et it ion .
Th e m a cr oecon om ic a n d fin a n cia l s y s t em con t r ol va r ia bles a r e in f lat ion , r eal GDP
g r ow t h a n d m ar k et cap it aliz at ion . In f lat ion is t h e a n n u a l p er cen t a g e ch a n g e in t h e cou n t r y
GDP d efla t or . Th e ba n k in g m a r k et is les s lik ely t o be com p et it ive w h en it is s u bject t o h ig h
in fla t ion , a s t h e p r ices of fin a n cia l s er vices , s u ch a s in t er es t r a t es , a r e les s in for m a t ive
(Cla es s en s a n d La even , 2 0 0 4 ), a n d w ill in t u r n ex a cer ba t e cr ed it m a r k et fr ict ion s (Boy d et
a l, 2 0 0 1 ). An g elin i a n d Cet or elli (2 0 0 3 ) fin d evid en ce of a n eg a t ive r ela t ion s h ip bet w een

Th e Sar g an t es t is a n oth er tes t of over id en t ify in g con d it ion s a s d is cu s s ed in Ar ella n o a n d Bon d (1 9 9 1 ). Th is tes t ,
h owever , r eq u ir es h om os ced as t ic er r or s for con s is t en cy , w h ich is n ot n eces s ar ily t h e cas e in ou r la r g e cr os s cou n t r y d a t a s a m p le. H en ce we r ep or t H an s en s t a t is t ics on ly .
7

Th e fa ilu r e t o p a s s eit h er of t h e t es t s in s om e ca s es s u g g es ts t h a t t h es e es t im a t es a r e n ot com p letely fr ee of

s t a t is t ica l p r oblem s . H owever , in s tea d of u s in g d iffer en t m eth od olog ies for d iffer en t cou n t r ies , a con s is t en t
m et h od olog y is a d op ted s o th a t t h e r es u lts a r e com p ar a ble.

in fla t ion a n d com p et it ion , s u g g es t in g a n a s s ocia t ion bet w een h ig h in fla t ion a n d t h e
p er s is t en ce of p r ofit .
A p os it ive r ela t ion s h ip is ex p ect ed bet w een r eal GDP g r ow t h a n d bu s in es s
op p or t u n it ies for ba n k s . Th e in cr ea s ed bu s in es s op p or t u n it ies m a y h elp ba n k s t o s u s t a in
t h eir p r ofit s . Th er efor e a n a s s ocia t ion m ig h t be ex p ect ed bet w een g r ow t h in GDP a n d t h e
p er s is t en ce of p r ofit . On t h e ot h er h a n d , t h e a va ila bilit y of bu s in es s op p or t u n it ies m ig h t
lea d t o a n in t en s ifica t ion of com p et it ion , in w h ich ca s e a n eg a t ive r ela t ion s h ip w ou ld be
ex p ect ed bet w een GDP g r ow t h a n d t h e p er s is t en ce of p r ofit .
M ar k et cap it aliz at ion , t h e va lu e of lis t ed s h a r es on t h e d om es t ic s t ock m a r k et
d ivid ed by GDP , is a n in d ica t or of t h e s ize of t h e s t ock m a r k et r ela t ive t o t h e econ om y .
Cla es s en s a n d La even (2 0 0 4 ) a r g u e for a p os it ive a s s ocia t ion bet w een m a r k et ca p it a liza t ion
a n d com p et it ion , on t h e ba s is t h a t a h ig h ly d evelop ed n on -ba n k in g fin a n cia l s ect or m a y
a p p ly com p et it ive p r es s u r e u p on t h e ba n k in g s ect or . Th er efor e a n eg a t ive r ela t ion s h ip is
ex p ect ed bet w een m a r k et ca p it a liza t ion a n d t h e p er s is t en ce of p r ofit .
Th e r eg u la t or y con t r ol va r ia bles in clu d e p r ox ies for r es t r ict ion s on ba n k a ct ivit y ,
ca p it a l r eq u ir em en t s , a n d leg a l ba r r ier s t o en t r y , obt a in ed fr om t h e Ba r t h et a l. (2 0 0 4 ,
2 0 0 6 , 2 0 0 8 ) d a t a ba s e. A ct iv it y r es t r ict ion is a m ea s u r e of a ba n k s a bilit y t o en g a g e in t h r ee
fee-ba s ed a ct ivit ies , s ecu r it ies , in s u r a n ce a n d r ea l es t a t e, in a d d it ion t o in t er es t -ba s ed
8

ba n k in g a ct ivit y . Th is in d ica t or is s ca led fr om 0 t o 1 2 , w h er e a h ig h er va lu e in d ica t es m or e

on er ou s r es t r ict ion s . R es t r ict ion s on ba n k a ct ivit y m ig h t im p r ove t h e s a fet y a n d s ou n d n es s
of t h e ba n k in g s y s t em , by m in im izin g op p or t u n it ies for ba n k s t o t a k e on ex ces s ive r is k ,
elim in a t in g s om e con flict s of in t er es t , a n d s im p lify in g ba n k s u p er vis ion . H ow ever ,
r es t r ict ion s m ig h t a ls o r ed u ce or elim in a t e op p or t u n it ies for ba n k s t o r ea lize econ om ies of
s ca le a n d s cop e, or t o m a n a g e t h e va r ia bilit y in ea r n in g s a cr os s p r od u ct lin es .
T ot al f r act ion of en t r y d en ied is t h e n u m ber of en t r y a p p lica t ion s d en ied a s a
fr a ct ion of t h e n u m ber of a p p lica t ion s r eceived fr om d om es t ic a n d for eig n ba n k s over t h e
p er iod 2 0 0 1 t o 2 0 0 5 . Th is m ea s u r e r eflect s on e a s p ect of ba r r ier s t o en t r y , a n d a p os it ive
8

Ba n k s in bot h developed an d develop in g cou n t r ies h a ve in cr ea s ed t h e pr op or t ion of t h eir oper a t in g in com e

obt a in ed fr om n on -in ter es t s ou r ces in r ecen t y ear s . Wh ile p a r t of t h e in cr ea s e in n on -in t er es t in com e is d u e t o
d iver s ifica t ion in t o lin es of bu s in es s s u ch as in ves t m en t ba n k in g , ven t u r e ca p it a l a n d in s u r an ce u n der w r it in g ,
g r ow t h in fee-p a y in g a n d com m is s ion -p a y in g s er vices lin k ed t o t r a d it ion a l r et a il ba n k in g s er vices h as a ls o been
s ig n ifica n t . Mos t evid en ce s u g g es ts t h a t t h e s h ift t ow a r d s n on -in t er es t in com e h as n ot im p r oved r is k -a d ju s ted
r etu r n s (St ir oh a n d R u m ble, 20 0 6 ; God d a r d et a l., 2 0 0 8 ; St ir oh , 2 0 0 9 ).

10

r ela t ion s h ip is ex p ect ed bet w een t h is m ea s u r e a n d t h e p er s is t en ce of p r ofit . Dom es t ic

f r act ion of en t r y d en ied a n d f or eig n f r act ion of en t r y d en ied a r e u s ed a s a lt er n a t ive ba r r ier
t o en t r y m ea s u r es in s ep a r a t e es t im a t ion s .
Cap it al r eq u ir em en t s is d efin ed a s t h e m in im u m ca p it a l t o a s s et r a t io r eq u ir ed by
g over n m en t r eg u la t or y a g en cies . H ig h er cap it al r eq u ir em en t s in cr ea s e t h e s ize of en t r y
ba r r ier s , t h u s in s u la t in g in cu m ben t ba n k s fr om com p et it ion , a n d in cr ea s in g ba n k p r ofit
p er s is t en ce.
Fin an cial f r eed om is a m ea s u r e of ba n k in g s ecu r it y a s w ell a s a m ea s u r e of
in d ep en d en ce fr om g over n m en t con t r ol. Accor d in g t o t h e In d ex of E con om ic F r eed om
p u blis h ed in 2 0 0 9 , t h is m ea s u r e is d et er m in ed by t h e ex t en t of g over n m en t r eg u la t ion of
fin a n cia l s er vices , t h e a m ou n t of s t a t e in t er ven t ion in fin a n cia l in s t it u t ion s , en t r y ba r r ier s
t o t h e fin a n cia l s er vices a r ea , a n d g over n m en t in flu en ce on t h e a lloca t ion of cr ed it . Th e
h ig h er t h e s cor e, t h e les s t h e g over n m en t in flu en ce a n d h en ce t h e m or e fin a n cia l fr eed om .
An a s s ocia t ion is ex p ect ed bet w een t h e q u a lit y of t h e cou n t r y s in s t it u t ion a l a n d
ex t er n a l g over n a n ce fr a m ew or k a n d p er s is t en ce of p r ofit . Gover n a n ce r u les a n d p r a ct i ce
d iffer bet w een cou n t r ies , a n d a r e d ep en d en t on t h e level of econ om ic a n d fin a n cia l
d evelop m en t (La P or t a et a l., 1 9 9 8 , 2 0 0 2 ; Ch h a och h a r ia a n d La even , 2 0 0 9 ). F ou r
in s t it u t ion a l va r ia bles a r e u s ed , cover in g p r op er t y r ig h t s , in s t it u t ion a l d evelop m en t ,
econ om ic fr eed om , a n d GDP p er ca p it a . P r ot ect ion of p r op er t y r ig h t s is a n im p or t a n t p r e r eq u is it e for a w ell-fu n ct ion in g fin a n cia l s y s t em . Th e p r op er t y r ig h t s cova r ia t e, m ea s u r ed
on a s ca le of 1 t o 5 w it h h ig h er s cor es in d ica t in g s t r on g er p r ot ect ion , is 6 m in u s t h e
a ver a g e p r op er t y r ig h t s fr eed om in d ex r ep or t ed by t h e H er it a g e F ou n d a t ion over t h e p er iod
1 9 9 7 -2 0 0 7 . Th e K K Z in d ex (K a u fm a n et a l., 2 0 0 8 ) m ea s u r es t h e level of in s t it u t ion a l
d evelop m en t , ba s ed on s ix d im en s ion s of g over n a n ce, w it h h ig h er s cor es r efle ct in g a m or e
a d va n ced level of d evelop m en t . Th e a ver a g e va lu e for t h e p er iod 1 9 9 8 -2 0 0 7 is u s ed . Th e
d eg r ee of fr eed om en joy ed by bu s in es s es a n d in d ivid u a ls fr om g over n m en t in t er fer en ce is
m ea s u r ed by t h e econ om ic f r eed om cova r ia t e. Th is in d ica t or is 6 m in u s t h e a ver a g e
econ om ic fr eed om in d ex r ep or t ed by t h e H er it a g e F ou n d a t ion over t h e p er iod 1 9 9 7 -2 0 0 7 ,
m ea s u r ed on a s ca le of 1 t o 5 w it h h ig h er s cor es r eflect in g g r ea t er fr eed om . As a s t a n d a r d

11

m ea s u r e of econ om ic d evelop m en t , log a r it h m of p er cap it a GDP is fou n d by Cla es s en s a n d

La even (2 0 0 4 ) t o in flu en ce ba n k in g s ect or p er for m a n ce.
H H I, t h e H er fin d a h l-H ir s ch m a n In d ex , is u s ed a s a con cen t r a t ion m ea s u r e for ea ch
cou n t r y s ba n k in g s ect or . Accor d in g t o eit h er t h e collu s ion h y p ot h es is or t h e efficien cy
9

h y p ot h es is , a p os it ive r ela t ion s h ip is ex p ect ed bet w een con cen t r a t ion a n d t h e p er s is t en ce of

p r ofit (Ber g er , 1 9 9 5 ; God d a r d et a l., 2 0 0 1 ). Accor d in g t o t h e q u iet life h y p ot h es is ,
h ow ever , a n eg a t ive r ela t ion s h ip bet w een con cen t r a t ion a n d p er s is t en ce of p r ofit m ig h t be
ex p ect ed if t h e m a n a g er s of la r g e ba n k s ch oos e t o s et t le for a q u iet life in s t ea d of p u r s u in g
p r ofit s (H ick s , 1 9 3 5 ; Ber g er a n d H a n n a n , 1 9 9 8 ). Th e P a n za r a n d R os s e (1 9 8 7 ) H -s t at is t ic is
u s ed a s a n a lt er n a t ive con d u ct -ba s ed m ea s u r e of com p et it ive con d it ion s .

10

Ty p ica lly , t h e

em p ir ica l lit er a t u r e on ba n k com p et it ion t h a t u s es t h e H -s t a t is t ic r ep or t s evid en ce of

m on op olis t ic com p et it ion (Ca r bo et a l. 2 0 0 9 ; God d a r d a n d Wils on , 2 0 0 9 ).

11

4 . Da t a a n d re s u l t s

F or a n in du s tr y th a t con s is t s of a s in g le m on op oly p r odu cer , H H 1 . A m on op olis t h a s a m a r k et s h a r e of s 1 1 .

F or a n in d u s t r y w it h N fir m s , t h e m a x im u m p os s ible va lu e of t h e Her fin d ah l H ir s ch m a n in d ex is H H 1 , a n d th e
m in im u m p os s ible va lu e is H H 1 /N . Th e m a x im u m va lu e of H H 1 occu r s w h en t h e s ize d is t r ibu t ion of t h e N
fir m s is h ig h ly s k ewed . In th e m os t ex t r em e cas e, on e d om in a n t fir m h as a m a r k et s h a r e on ly fr act ion a lly s m a ller
t h a n 1 , a n d N 1 ver y s m a ll fir m s ea ch h as a m a r k et s h a r e on ly fr act ion a lly la r g er t h a n zer o.
9

10

Un d er m on op oly con d it ion s H<0 a s a n in cr ea s e in a ver a g e c os t r es u lt in g fr om a n eq u i-pr opor t ion a te in cr ea s e in

fa ct or in p u t pr ices lea ds t o a n in cr ea s e in equ ilibr iu m pr ice an d , s in ce th e pr ofit -m a x im is in g fir m op er a tes on th e
p r ice-ela s t ic s eg m en t of t h e m ar k et dem a n d fu n ct ion , t h is r es u lt s in a r ed u ct ion in r ev en u e. Un der per fect
com pet it ion , H =1 . Th e r epr es en t a t ive fir m h olds it s ou tp u t con s t an t a n d r a is es it s pr ice in pr op or t ion t o t h e
in cr eas e in a ver ag e cos t . In t h e ca s e of m on op olis t ic com pet it ion , 0 <H <1 . H er e t h e r ep r es en ta t ive fir m a ch ieves
eq u ilibr iu m a t Ch a m ber lin s (19 3 3 ) t a n g en cy s olu t ion , w it h (i) MR =MC (m a r g in a l r even u e eq u als m ar g in a l cos t )
a n d (ii) AR =AC (a ver a g e r even u e eq u als a ver a g e cos t ). Th e p er ceived n u m ber of com pet it or fir m s deter m in es bot h
t h e loca t ion a n d t h e p r ice ela s ticit y of t h e per ce ived dem an d fu n ct ion . F ollow in g a n in cr ea s e in AC, bot h ou t p u t
a n d t h e p er ceived n u m ber of com p et it or fir m s a d ju s t in or d er t o s a t is fy (i) a n d (ii). Th is a d ju s t m en t p r odu ces a
ch an g e in r even u e t h a t is p os itive, bu t p r op or t ion a tely s m a ller t h a n th e in cr eas e in t h e in p u t p r ices . In th is s en s e,
t h e n u m er ica l va lu e of H w it h in t h e r a n g e 0 <H <1 can be in ter pr eted as a m ea s u r e of t h e in ten s it y of com pet it ion ,
w it h in a s pect r u m of cas es t h at a r e ch a r acter ized by t h e m on op olis t ic com p et it ion m odel.
11
Th e H -s t a t is t ic is es t im a ted u s in g t h e follow in g r ed u ced -for m r even u e equ a t ion :

ln( Pit ) 1 ln(W1,it ) 2 ln(W2,it ) 3 ln(W3,it ) 1 ln(Y1,it ) 2 ln(Y2,it ) 3 ln(Y3,it )

D it
w h er e Pit is

t h e r a t io of g r os s in t er es t r even u e t o t ot a l a s s ets (p r ox y for ou t pu t p r ice of loa n s ),

W1,it

is t h e r a t io

of in t er es t ex p en s e t o t ot a l d epos it s an d m on ey ex pen s e t o t ota l a s s et s (pr ox y for in p u t p r ice of dep os it s ),

W2,it

is

W3,it is t h e r at io of over h eads

s u bs cr ip t i d en ot es ba n k i , a n d t h e

t h e r a t io of per s on a l ex pen s es t o t ot a l a s s ets (pr ox y for in pu t p r ice of la bou r ), an d

t o t ot a l a s s ets (p r ox y for in p u t p r ice of eq u ip m en t /fix ed ca p it a l). Th e

s u bs cr ip t t d en otes y ear t . Th r ee con t r ol var ia bles a r e a t th e in d ivid u a l ba n k level. Specifica l ly ,

eq u ity t o t ot a l a s s et s ,

2,it

is t h e r a t io of n et loa n s t o t ot a l as s ets , a n d

3,it

is t h e r a t io of

is t h e log a r ith m of t ota l a s s et s (to

con tr ol for p oten t ia l s ize effects ). D is a vect or of y e a r du m m ies for y ear s 1 9 9 8 t h r ou g h 2 0 07 .

12

1,it

F in a n cia l a ccou n t s d a t a (u n con s olid a t ed ) for t h e p er iod 1 9 9 7 t o 2 0 0 7 for 1 1 ,6 3 4

ba n k s fr om 6 5 cou n t r ies a r e obt a in ed fr om Ba n k s cop e. Th e s a m p le s elect ion cr it er ia a r e a s
follow s . An y cou n t r y w it h five or m or e com m er cia l ba n k s (d om es t ic or for eig n ) is s elect ed
for t h e fir s t -s t a g e a n a ly s is . Th e s t a r t -y ea r , 1 9 9 7 , is con s t r a in ed by t h e a va ila bilit y of d a t a
on Ba n k s cop e. To elim in a t e ou t lier s , obs er va t ion s for w h ich t h e p r ofit r a t e w a s m or e t h a n
t h r ee s t a n d a r d d evia t ion s fr om t h e s a m p le m ea n of ea ch cou n t r y a r e d elet ed . Cou n t r ies for
w h ich j is es t im a t ed a t t h e fir s t s t a g e u s in g d a t a for few er t h a n 1 5 ba n k s a r e elim in a t ed
fr om t h e s econ d -s t a g e a n a ly s is .
Th e d a t a for t h e m a cr oecon om ic a n d r eg u la t or y va r ia bles u s ed in t h e s econ d -s t a g e
a n a ly s is a r e obt a in ed fr om t h e follow in g s ou r ces . Ma cr oecon om ic d a t a (in fla t i on , GDP p er
ca p it a , r ea l GDP g r ow t h , s t ock m a r k et ca p it a liza t ion ) a r e obt a in ed fr om t h e Wor ld Ba n k s
Wor ld Develop m en t In d ica t or s . Th e r eg u la t or y va r ia bles (a ct ivit y r es t r ict ion s , ca p it a l
r eq u ir em en t s ) a n d t h e d om es t ic a n d for eig n en t r y va r ia bles a r e obt a i n ed fr om Ba r t h et a l.
(2 0 0 8 ). Th e fin a n cia l fr eed om , econ om ic fr eed om a n d p r op er t y r ig h t s va r ia bles a r e obt a in ed
fr om t h e E con om ic F r eed om In d ex of t h e H er it a g e F ou n d a t ion ; t h e K K Z in d ex is obt a in ed
fr om K a u fm a n n et a l. (2 0 0 8 ). F u ll d et a ils of s ou r ces a n d va r ia ble d efin it ion s a r e lis t ed in
Ta ble 1 .

Ta bl e 1 Da t a s ou rce s a n d v a ri a bl e de fi n i t i on s

Th e fin a l s a m p le for t h e fir s t -s t a g e a n a ly s is is a n u n ba la n ced p a n el w it h 4 6 ,9 5 9

ba n k -y ea r obs er va t ion s (1 1 ,6 3 4 ba n k s ). Th e p r ofit r a t e m ea s u r e is r et u r n on a ver a g e eq u it y
(R OE ), m ea s u r ed by t h e r a t io of n et in com e a ft er t a x t o t ot a l eq u it y .

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Ta x es a r e d ed u ct ed ,

beca u s e if effect ive t a x r a t es d iffer bet w een cou n t r ies , en t r y a n d ex it s h ou ld be d r iven by

a ft er -t a x p r ofit s . Th e p r ofit r a t e of ba n k i loca t ed in cou n t r y j a t y ea r t , i,t , is n or m a lized by
d ed u ct in g t h e m ea n p r ofit r a t e of a ll ba n k s loca t ed in cou n t r y j in y ea r t .

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Th e em p ir ica l a n a ly s is is a ls o con du ct ed u s in g a r et u r n on a ver ag e as s ets (R OA) p r ofit a bilit y m ea s u r e. To s a ve

s p ace t h es e es t im a t ion s ar e n ot r ep or ted , bu t t h ey a r e a va ila ble fr om t h e a u th or s u p on r equ es t .

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Ta ble 2 a n d 5 collect ively r ep or t s d es cr ip t ive s t a t is t ics for r et u r n on eq u it y .

Su m m a r y d a t a a r e t a bu la t ed for a ll cou n t r ies , ba s ed on a ver a g e s for t h e p er iod 1 9 9 7 -2 0 0 7
in Ta ble 5 . Aver a g e p r ofit a bilit y va r ies s ig n ifica n t ly bet w een cou n t r ies . Th e low es t a ver a g e
R OE a r e -9 .1 0 % (Ur u g u a y ) a n d -4 .2 9 (Th a ila n d ). Th e h ig h es t a r e 2 5 .3 7 % (Ven ezu ela ) a n d
2 3 .8 4 % (N ig er ia ). Aver a g e p r ofit a bilit y w a s h ig h er in d evelop in g cou n t r ies (1 0 .8 7 %) t h a n
in d evelop ed cou n t r ies (6 .5 1 %). By r eg ion (Ta ble 2 ), N or t h Am er ica n ba n k s r ep or t ed t h e
h ig h es t p r ofit a bilit y on a ver a g e (1 2 .7 6 %). E a s t As ia n a n d P a cific r eg ion ba n k s r ep or t ed t h e
low es t p r ofit a bilit y on a ver a g e (1 .0 6 %). Ta ble 3 r ep or t s d es cr ip t ive s t a t is t ics for t h e
d ep en d en t va r ia ble a n d cova r ia t es u s ed in t h e s econ d -s t a g e a n a ly s is , w h ile Ta ble 4 p r es en t s
t h e cor r ela t ion m a t r ices .

In s e rt Ta bl e s 2 a n d 3 De s cri pt i v e s t a t i s t i c for profi t ra t e s a n d ot h e r v a ri a bl e s

In s e rt Ta bl e 4 Corre l a t i on Ma t ri ce s

Fir s t -s t ag e an aly s is : es t im at in g t h e p er s is t en ce of p r of it

Ta ble 5 r ep or t s es t im a t es of t h e s h or t -r u n p er s is t en ce of p r ofit coefficien t s by

cou n t r y , j in (5 ). Cou n t r ies for w h ich t h e es t im a t ed p er s is t en ce of p r ofit coef ficien t lies
ou t s id e t h e r a n g e (-1 , 1 ) a r e om it t ed fr om Ta ble 5 .

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In s e rt t a bl e 5 P rofi t pe rs i s t e n ce pa ra m e t e rs -- t w o s t e p dy n a m i c pa n e l da t a m ode l

In Ta ble 5 , t h e es t im a t ed p er s is t en ce of p r ofit coefficien t is p os it ive for 6 2 of t h e 6 5

cou n t r ies , a n d n eg a t ive for t h r ee cou n t r ies (Cos t a R ica , Dom in ica n R ep u blic a n d Sou t h
K or ea ). Th e m ea n j for t h e en t ir e s a m p le is 0 .4 3 , s om ew h a t h ig h er t h a n t h e m ea n va lu e for
s ix E u r op ea n cou n t r ies of 0 .2 6 r ep or t ed by God d a r d et a l. (2 0 0 4 a ). Th e r es u lt s s u g g es t t h a t
t h e elim in a t ion of a bn or m a l p r ofit s t h r ou g h com p et it ion is by n o m ea n s in s t a n t a n eou s .

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Micr oecon om ic t h eor y p r ed icts t h a t t h e d yn a m ic pr oces s of com p et it ion w ill r es t or e p r ofits t o a n or m a l r etu r n .
As s u m in g t h a t -1 1 p r ofits w ill con ver g e t o t h e eq u ilibr iu m r a t e of r et u r n over t im e.

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Ba r r ier s t o en t r y a n d ex it a r e s u fficien t ly h ig h t o en a ble ba n k s t o r et a in a s ig n ifica n t

p or t ion of t h eir a bn or m a l p r ofit s fr om y ea r t o y ea r .

Ta ble 5 r ep or t s t h e fr eq u en cy d is t r ibu t ion of t h e es t im a t ed p er s is t en ce of p r ofit

coefficien t s , j. F or 4 0 of t h e 6 5 cou n t r ies , t h e es t im a t ed j lies w it h in t h e in t er va l 0 .2 t o
0 .6 . Develop ed cou n t r ies h a ve s lig h t ly h ig h er p er s is t en ce of p r ofit (a ver a g e j = 0 .4 4 2 )
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t h a n d evelop in g cou n t r ies (a ver a g e j = 0 .4 2 6 ), bu t t h es e d iffer en ces a r e n ot s ig n ifica n t .

In s e rt t a bl e 6 fre qu e n cy di s t ri bu t i on of t h e pe rs i s t e n ce coe ffi ci e n t s

Ta ble 6 a ls o r ep or t s t h e a ver a g e es t im a t ed j for cou n t r ies loca t ed in eig h t

in t er n a t ion a l r eg ion s : La t in Am er ica a n d Ca r ibbea n ; E a s t As ia a n d t h e P a cific; N or t h
Am er ica ; Wes t E u r op e; E a s t E u r op e; Mid d le E a s t a n d N or t h Afr ica ; Su b -Sa h a r a n Afr ica ;
a n d Sou t h As ia . Th er e is con s id er a ble r eg ion a l va r ia t ion in t h e a ver a g e p er s is t en ce of
p r ofit . Th e h ig h es t a ver a g e j a r e obt a in ed for N or t h Am er ica (a ver a g e = 0 .6 8 0 ) a n d
Wes t er n E u r op e (a ver a g e = 0 .4 9 5 ). Th e low es t va lu es a r e obt a in ed for E a s t As ia a n d t h e
P a cific (a ver a g e = 0 .2 8 8 ) a n d Su b-Sa h a r a n Afr ica (a ver a g e = 0 .2 9 6 ).

S econ d -s t ag e an aly s is : id en t if y in g t h e d et er m in an t s of p er s is t en ce of p r of it

Th e s econ d -s t a g e a n a ly s is ex a m in es t h e d et er m in a n t s of t h e p er s is t en ce of p r ofit .
Ta ble 7 r ep or t s t h e es t im a t ion r es u lt s . In colu m n 1 , on ly t h e m a cr oecon om ic va r ia bles
(in fla t ion , r ea l GDP g r ow t h , s t ock m a r k et ca p it a liza t ion ) a r e in clu d ed in t h e es t im a t ion . In
colu m n s 2 -7 , t h e r eg u la t or y va r ia bles (en t r y ba r r ier s , a ct ivit y r es t r ict ion s , ba r r ier s t o
d om es t ic ba n k s , a n d ba r r ier s t o for eig n ba n k s ) a r e a d d ed , on e a t a t im e. In colu m n s 8 -1 1
t h e in s t it u t ion a l a n d ex t er n a l g over n a n ce va r ia bles (p r op er t y r ig h t s , K K Z in d ex , GDP p er
ca p it a a n d econ om ic fr eed om ) a r e a d d ed . In colu m n s 1 2 -1 3 t h e in d u s t r y con cen t r a t ion a n d
com p et it ion m ea s u r es (H H I a n d H -s t a t is t ic) a r e a d d ed . F in a lly , in colu m n 1 4 a ll cova r ia t es

14

Th e defin it ion of a d va n ced a n d d evelop in g cou n t r ies fo llows t h e IMF , In t er n a t ion a l F in a n cia l St a t is t ics (20 0 8 ).

15

a r e in clu d ed in a m u lt iva r ia t e m od el of t h e d et er m in a n t s of p er s is t en ce of p r ofit .

Win d m eijer s m a ll s a m p le cor r ect ion is u s ed t o obt a in r elia ble s t a n d a r d er r or s .

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In s e rt Ta bl e 7 Cros s cou n t ry de t e rm i n a n t s of s h ort ru n profi t s pe rs i s t e n ce

Am on g t h e m a cr oecon om ic va r ia bles , in fla t ion g en er a lly h a s a p os it ive im p a ct on

t h e p er s is t en ce of p r ofit , a lt h ou g h on ly a few of t h e coefficien t s a r e s ig n ifica n t . In colu m n
4 , t h er e is a s ig n ifica n t n eg a t ive r ela t ion s h ip bet w een s t ock m a r k et ca p it a liza t ion a n d t h e
p er s is t en ce of p r ofit . Th is w ou ld s u g g es t t h a t t h e m or e h ig h ly d evelop ed is t h e n on -ba n k
fin a n cia l s ect or , t h e g r ea t er is t h e com p et it ive p r es s u r e on t h e ba n k in g s ect or . H ow ever ,
t h is fin d in g is r ever s ed in colu m n 1 4 . Over a ll, t h er efor e, t h er e is lit t le evid en ce for a n y
r ela t ion s h ip bet w een fin a n cia l s ect or d evelop m en t a n d t h e p er s is t en ce of ba n k p r ofit . Th e
coefficien t s on GDP g r ow t h a r e p r ed om in a n t ly n eg a t ive, a n d s ig n ifica n t in m a n y ca s es .
Th is is con s is t en t w it h t h e a r g u m en t t h a t g r ea t er bu s in es s op p or t u n it ies a ffor d ed by
h ig h er econ om ic g r ow t h low er t h e op p or t u n it y cos t of en t er in g t h e ba n k in g s ect or , t h er eby
r ed u cin g en t r y ba r r ier s . Su bs eq u en t ly , in cr ea s ed com p et it ion w ea k en s t h e a bilit y of
in cu m ben t ba n k s t o s u s t a in t h eir p r ofit a bilit y .
Th e coefficien t s on t h e t h r ee leg a l ba r r ier s t o en t r y in d ica t or s in colu m n s 2 , 6 a n d 7
a r e p os it ive a n d s ig n ifica n t . Th is s u g g es t s t h a t s u cces s fu l ba n k s in m a r k et s t h a t a r e
p r ot ect ed by en t r y ba r r ier s a r e m or e a ble t o s u s t a in t h eir p r ofit a bilit y over t im e. Th e
r em a in in g r eg u la t or y va r ia bles - a ct ivit y r es t r ict ion s , ca p it a l r eg u la t ion , a n d fin a n cia l
fr eed om - s eem t o ex er t lit t le or n o in flu en ce on t h e p er s is t en ce of p r ofit .
Over a ll, r eg u la t ion a p p ea r s t o im p a ct on t h e p er s is t en ce of p r ofit t h r ou g h t h e
er ect ion a n d en for cem en t of leg a l ba r r ier s t o en t r y . H ig h er en t r y ba r r ier s t en d t o r ed u ce
com p et it ion , a n d in cr ea s e p r ofit a bilit y . Th e op p os it e is a ls o t r u e. F or in cu m ben t ba n k s ,
h ow ever , ot h er t y p es of r eg u la t ion d o n ot ex er t a n y d is cer n a ble im p a ct on com p et it ion
m ea s u r ed by t h e p er s is t en ce of p r ofit .

15

Th e con tr ol va r ia bles a r e s elect ed t o a void h ig h cor r ela t ion , a n d p r oblem s of m u lt icollin ear ity a r e t h er efor e
m in im a l.

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Am on g t h e in s t it u t ion a l a n d ex t er n a l g over n a n ce va r ia bles , t h e coefficien t on t h e

p r op er t y r ig h t s m ea s u r e is n eg a t ive a n d s ig n ifica n t in colu m n 1 1 . Th is s u g g es t s t h a t t h e
s t r on g er is t h e p r ot ect ion of p r op er t y r ig h t s , t h e low er is t h e p er s is t en ce of p r ofit . Wit h
s t r on g er p r op er t y r ig h t s , n ew en t r a n t s m a y feel m or e s ecu r e in con d u ct in g bu s in es s , s o t h e
in t en s it y of com p et it ion in cr ea s es . Th e coefficien t s on t h e ot h er in s t it u t ion a l va r ia bles a r e
n eg a t ive in colu m n s 9 a n d 1 0 , bu t t h es e coefficien t s a r e n ot s ig n ifica n t .
Th er e is n o r ela t ion s h ip bet w een t h e H H I in d ex a n d t h e p er s is t en ce of p r ofit ,
a ccor d in g t o t h e es t im a t ion r ep or t ed in colu m n 1 2 . Differ en ces bet w een t h e object ives of
ba n k s m a y r en d er t h e r ela t ion s h ip bet w een in d u s t r y s t r u ct u r e a n d con cen t r a t ion t en u ou s .
F or ex a m p le, s om e ba n k s m ig h t s a cr ifice p ot en t ia l p r ofit s in or d er t o r ed u ce r is k by
m a k in g m or e s ecu r e in ves t m en t s ; or a lt er n a t ively , s om e ba n k s m ig h t s im p ly en joy a q u iet
life a ffor d ed by a la ck of com p et it ive d is cip lin e (Ber g er a n d H a n n a n , 1 9 9 8 ; God d a r d et a l.,
2 0 0 4 b). Sim ila r ly , t h er e is n o r ela t ion s h ip bet w een t h e R os s e -P a n za r H -s t a t is t ic a n d t h e
p er s is t en ce of p r ofit , a ccor d in g t o t h e es t im a t ion r ep or t ed in colu m n 1 3 . In colu m n 1 4 ,
h ow ever , w h er e bot h t h e H H I in d ex a n d t h e H -s t a t is t ic a r e in clu d ed , t h e coefficien t s on bot h
a r e s ig n ifica n t . Th e r ela t ion s h ip bet w een t h e H H I a n d t h e p er s is t en ce of p r ofit is n eg a t ive,
in a ccor d a n ce w it h t h e collu s ion h y p ot h es is of a n a s s ocia t ion bet w een con cen t r a t ion a n d
en t r y ba r r ier s . Th e r ela t ion s h ip bet w een t h e H -s t a t is t ic a n d t h e p er s is t en ce of p r ofit is
n eg a t ive. Th is fin d in g is a ls o con s is t en t w it h a n a s s ocia t ion bet w een t h e in t en s it y of
com p et it ion a n d t h e p er s is t en ce of p r ofit .
In t h e m u lt iva r ia t e m od el r ep or t ed in colu m n 1 4 , t h e coefficien t s on t h e t o t a l
fr a ct ion of en t r y d en ied , p r op er t y r ig h t s a n d GDP g r ow t h va r ia bles becom e in s ig n ifica n t . It
a p p ea r s t h a t t h e m a r k et s t r u ct u r e a n d com p et it ion va r ia bles t en d t o d om in a t e t h e en t r y
ba r r ier s , in s t it u t ion a l a n d m a cr oecon om ic va r ia bles in ex p la in in g t h e va r ia t ion in t h e
p er s is t en ce of p r ofit .

5 . Con cl u s i on

Over t h e p a s t t h r ee d eca d es , ba n k in g m a r k et s a r ou n d t h e w or ld h a ve ex p er ien ced

fu n d a m en t a l r eg u la t or y a n d s t r u ct u r a l ch a n g e, w it h p r ofou n d im p lica t ion s for t h e

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in t en s it y of ba n k com p et it ion . Us in g a la r g e cr os s -cou n t r y d y n a m ic p a n el d a t a s et , t h is

p a p er r ep or t s es t im a t es of t h e in t en s it y of com p et it ion , ba s ed on a d y n a m ic a n a ly s is of t h e
p er s is t en ce of ba n k p r ofit over t im e. In con t r a s t w it h t h e es s en t ia lly s t a t ic s t r u ct u r e con d u ct -p er for m a n ce (SCP ) a n d n ew em p ir ica l in d u s t r ia l or g a n iza t ion (N E IO) fr a m ew or k s ,
w h ich d om in a t e t h e a n a ly s is of com p et it ion in t h e em p ir ica l ba n k in g lit er a t u r e, t h is p a p er
a d op t s a d y n a m ic view of ba n k com p et it ion . Th e p r es en t a p p r oa ch is con s is t en t w it h t h e
view , a r t icu la t ed in t h e con t es t a ble m a r k et s lit er a t u r e, t h a t t h r ea t en ed or p ot en t ia l en t r y is
a s im p or t a n t a s a ct u a l en t r y in d et er m in in g t h e in t en s it y of com p et it ion .
A t w o-s t a g e a n a ly s is of t h e p er s is t en ce of p r ofit is r ep or t ed u s in g d a t a on ba n k s
fr om 6 5 cou n t r ies over t h e p er iod 1 9 9 7 t o 2 0 0 7 . At t h e fir s t s t a g e, a fir s t -or d er
a u t or eg r es s ive m od el is u s ed t o es t im a t e t h e s h or t -r u n p er s is t en ce (s p eed of a d ju s t m en t ) of
ba n k p r ofit . Th e s p eed of con ver g en ce va r ies bet w een cou n t r ies , w it h ba n k s in d evelop ed
cou n t r ies ex h ibit in g h ig h er p er s is t en ce of p r ofit on a ver a g e t h a n t h os e in d evelop in g
cou n t r ies . Alt h ou g h com p et it ion ex er t s s om e d is cip lin e on ba n k p r ofit a bilit y , a d ju s t m en t
t ow a r d s eq u ilibr iu m a ft er a n a bn or m a l p r ofit h a s been ea r n ed is by n o m ea n s
in s t a n t a n eou s . Ba r r ier s t o en t r y a n d ex it a r e s u fficien t ly h ig h t o en a ble ba n k s t o r et a in a
s ig n ifica n t p or t ion of t h eir a bn or m a l p r ofit s fr om y ea r t o y ea r .
At t h e s econ d s t a g e, t h e d et er m in a n t s of t h e p er s is t en ce of p r ofit a r e ex a m in ed . Th e
es t im a t ed p er s is t en ce coefficien t s fr om t h e fir s t s t a g e a r e u s ed a s t h e d ep en d en t va r ia ble in
r eg r es s ion s w it h cova r ia t es t h a t m ea s u r e m a cr oecon om ic con d it ion s , ba n k r eg u la t ion , t h e
in s t it u t ion a l en vir on m en t a n d ex t er n a l g over n a n ce, a n d com p et it ion . Th e r es u lt s s u g g es t
t h a t t h e p er s is t en ce of p r ofit is s t r on g er in m a r k et s t h a t a r e s h elt er ed fr om com p et it ion by
leg a lly im p os ed a n d en for ced ba r r ier s t o en t r y .
F r om a n a n t it r u s t , r eg u la t or y a n d s u p er vis or y p er s p ect ive, t h e a p p r oa ch t h a t is
a d op t ed in t h is p a p er s u g g es t s t h a t p olicy r ecom m en d a t i on s ba s ed on p r ofit s p r eva ilin g in
t h e ba n k in g s ect or a t a n y p oin t in t im e a r e in a d vis a ble, a s cu r r en t p r ofit a bilit y is
es s en t ia lly a t r a n s it or y p h en om en on . A d y n a m ic m od el of p r ofit a bilit y p r ovid es a n
in d ica t ion of t h e efficien cy of com p et it ion in for cin g t h e a d ju s t m en t or con ver g en ce of
p r ofit s (a bove or below t h e n or m ) t ow a r d s t h eir lon g -r u n eq u ilibr iu m va lu es . Th is a s s is t s
t h e r eg u la t or in d is t in g u is h in g bet w een ca s es in w h ich a com p et it ive eq u ilibr iu m is lik ely

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t o be a ch ieved r a p id ly w it h ou t in t er ven t i on , a n d ca s es in w h ich r eg u la t or y in t er ven t ion

m a y be r eq u ir ed in or d er t o a ch ieve a com p et it ive ou t com e.

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R e fe re n ce s

Ag os t in o, M., Leon id a , L., a n d Tr ivier i, F ., (2 0 0 5 ) P r ofit s p er s is t en ce a n d ow n er s h ip :

evid en ce fr om t h e It a lia n ba n k in g s ect or , A p p lied E con om ics , 3 7 , 1 6 1 5 -2 1 .

An g elin i, P . a n d N . Cet or elli, (2 0 0 3 ) E ffect s of r eg u la t or y r efor m on com p et it ion in ba n k in g ,

J ou r n al of M on ey , Cr ed it an d B an k in g , 3 5 , 6 6 3 -6 8 4 .

Ar ella n o, M., Bon d , S., (1 9 9 1 ) Som e Tes t s of Sp ecifica t ion for P a n el Da t a : Mon t e Ca r lo
E vid en ce a n d a n Ap p lica t ion t o E m p loy m en t E q u a t ion s , R ev iew of E con om ic S t u d ies 5 8 ,
2 7 7 2 9 7 .

Ar ella n o, M. a n d Bover , O. (1 9 9 5 ) An ot h er look a t t h e in s t r u m en t a l va r ia ble es t im a t ion of

er r or -com p on en t s m od els , J ou r n al of E con om et r ics , 6 8 , 2 9 -5 1 .

At h a n a s og lou , P . P ., Br is s im is , S.N . a n d Delis , M.D. (2 0 0 8 ) Ba n k -s p ecific, In d u s t r y -s p ecific

a n d m a cr oecon om ic Det er m in a n t s of Ba n k P r ofit a bilit y , J ou r n al of In t er n at ion al Fin an cial
M ar k et s In s t it u t ion s an d M on ey , 1 8 , 1 2 1 -1 3 6 .

Ba r t h , J .R ., Ca p r io, G., Levin e, R ., (2 0 0 4 ) Ba n k r eg u la t ion a n d s u p er vis ion : w h a t w or k s

bes t ? J ou r n al of Fin an cial In t er m ed iat ion , 1 3 , 2 0 5 -2 4 8 .

Ba r t h , J .R ., Ca p r io, G., Levin e, R (2 0 0 6 ) R e-t h in k in g B an k R eg u lat ion : T ill A n g els Gov er n .

Ca m br id g e: Ca m br id g e Un iver s it y P r es s .

Ba r t h , J .R ., Ca p r io, G., Levin e, R (2 0 0 8 ) Ba n k R eg u la t ion s Ar e Ch a n g in g : F or Bet t er or

Wor s e? Com p ar at iv e E con om ic S t u d ies , 5 0 , 5 3 7 -6 3

Ba u m ol, W, P a n za r , J a n d Willig , R , (1 9 8 2 ) Con t es t able m ar k et s an d t h e t h eor y of

in d u s t r ial s t r u ct u r e. N ew Yor k : H a r cou r t Br a ce J ova n ovich .

20

Bek t a s , E . (2 0 0 7 ) Th e p er s is t en ce of p r ofit s in t h e Tu r k is h ba n k in g s y s t em , A p p lied

E con om ics L et t er s , 1 4 , 1 8 7 -1 9 0 .

Ber g er , A.N ., (1 9 9 5 ) Th e p r ofit -s t r u ct u r e r ela t ion s h ip in ba n k in g : t es t s of m a r k et p ow er

a n d efficien t s t r u ct u r e h y p ot h es es . J ou r n al of M on ey , Cr ed it an d B an k in g 2 7 , 4 0 4 -4 3 1 .

Ber g er , A.N . (2 0 0 7 ) Obs t a cles t o a Globa l Ba n k in g Sy s t em : Old E u r op e ver s u s N ew

E u r op e, J ou r n al of B an k in g an d Fin an ce, 3 1 , 1 9 5 5 -1 9 7 6 .

Ber g er , A.N . a n d H a n n a n , T.H . (1 9 9 8 ) Th e efficien cy cos t of m a r k et p ow er in t h e ba n k in g

in d u s t r y : a t es t of t h e q u iet life a n d r ela t ed h y p ot h es es , R ev iew of E con om ics an d S t at is t ics ,
8 0 , 4 5 4 6 5 .

Ber g er , A.N ., K a s h y a p , A.K . a n d Sca lis e, J .M. (1 9 9 5 ) Th e t r a n s for m a t ion of t h e US

Ba n k in g in d u s t r y : w h a t a lon g s t r a n g e t r ip it s been , B r ook in g s Pap er s on E con om ic
A ct iv it y , 2 , 5 4 -2 1 9 .

Ber g er , A.N ., Bon im e, S.D., Covit z, D.M., H a n cock , D., (2 0 0 0 ) Wh y a r e ba n k p r ofit s s o

p er s is t en t ? Th e r oles of p r od u ct m a r k et com p et it ion , in for m a t ion op a cit y a n d r eg ion a l
m a cr oecon om ic s h ock s . J ou r n al of B an k in g an d Fin an ce 2 4 , 1 2 0 3 -1 2 3 5 .

Ber g er , A.N ., Dem er g u c-K u n t , A., Levin e, R ., H a u br ich , J .C., (2 0 0 4 ) Ba n k con cen t r a t io n
a n d com p et it ion . J ou r n al of M on ey , Cr ed it an d B an k in g 3 6 , 4 3 3 -4 5 1 .

Bla ck , S.E . a n d St r a h a n , P .E . (2 0 0 2 ) E n t r ep r en eu r s h ip a n d ba n k cr ed it a va ila bilit y , J ou r n al

of Fin an ce, 5 7 , 2 8 0 7 -2 8 3 3 .

Blu n d ell, R a n d Bon d S (1 9 9 8 ) In it ia l Con d it ion s a n d Mom en t R es t r ict ion s in Dy n a m ic

P a n el Da t a Mod els . J ou r n al of E con om et r ics , 8 7 , 1 1 5 -1 4 3 .

21

Bon a ccor s i Di P a t t a , E . a n d DellAr icca , G. (2 0 0 4 ) Ba n k com p et it ion a n d fir m cr ea t ion ,

J ou r n al of M on ey Cr ed it an d B an k in g , 3 6 , 2 2 5 -2 5 2 .

Boy d J .H ., Levin e R ., a n d Sm it h B.D. (2 0 0 1 ), Th e Im p a ct of In fla t ion on F in a n cia l Sect or

P er for m a n ce, J ou r n al of M on et ar y E con om ics 4 7 , 2 2 1 -2 4 8 .

Br a t la n d J . (2 0 0 4 ) Con t es t a ble m a r k et Th eor y a s a R eg u la t or y F r a m ew or k : An Au s t r ia n

P os t m or t em , Q u ar t er ly J ou r n al of A u s t r ian E con om ics , 7 , 3 -2 8 .

Ca r bo, S. a n d F er n a n d ez, F . (2 0 0 7 ) Th e Det er m in a n t s of Ba n k Ma r g in s in E u r op ea n

Ba n k in g , J ou r n al of B an k in g an d Fin an ce, 3 1 2 0 4 3 -2 0 6 3 .

Ca r bo, S. H u m p h r ey , D. Ma u d os , J . a n d Moly n eu x , P (2 0 0 9 ) Cr os s -cou n t r y com p a r is on s of

com p et it ion a n d p r icin g p ow er in E u r op ea n ba n k in g , J ou r n al of In t er n at ion al M on ey an d
Fin an ce, 2 8 1 1 5 1 3 4

Cet or elli, N . a n d St r a h a n , P .E . (2 0 0 6 ) F in a n ce a s a ba r r ier t o en t r y : ba n k com p et it ion a n d

in d u s t r y s t r u ct u r e in loca l US ba n k in g m a r k et s , J ou r n al of Fin an ce, LX I, 4 3 7 - 4 6 1 .

Ch a m ber la in , E . (1 9 3 3 ). Th e t h eor y of m on op olis t ic com p et it ion . Ca m br id g e MA: H a r va r d

Un iver s it y P r es s .

Ch h a och h a r ia , V. a n d La even , L. (2 0 0 9 ) Cor p or a t e g over n a n ce n or m s a n d p r a ct ices ,

J ou r n al of Fin an cial In t er m ed iat ion , for t h com in g .

Cla r k e, G., Cu ll, R ., Ma r t in ez P er ia , M.S. a n d Sa n ch ez, S.M. (2 0 0 3 ) F or eig n Ba n k E n t r y :

E x p er ien ce, Im p lica t ion s for Develop in g E con om ies , a n d Ag en d a for F u r t h er R es ea r ch ,
W or ld B an k R es ear ch Obs er v er , 1 8 , 2 5 -5 9 .

22

Cla es s en s , S., Dem ir g u c-K u n t , A. a n d H u izin g a , H . (1 9 9 8 ) H ow Does F or eig n E n t r y a ffect

t h e d om es t ic ba n k in g s ect or ? W or ld B an k W or k in g Pap er N o: 1 9 1 8

Cla es s en s , S., a n d La even , L., (2 0 0 4 ) Wh a t d r ives ba n k com p et it ion ? Som e in t er n a t ion a l

evid en ce. J ou r n al of M on ey , Cr ed it an d B an k in g 3 6 , 5 6 3 -8 3 .

Dick , A.A. a n d H a n n a n , T.H . (2 0 0 9 ) Com p et it ion a n d a n t it r u s t in ba n k in g , in Ber g er , A.N .,

Moly n eu x , P . a n d Wils on , J .O.S. (ed s .) Ox f or d H an d book of B an k in g . Ox for d : Ox for d
Un iver s it y P r es s .

De You n g , R ., H u n t er , W., a n d Ud ell, G., (2 0 0 4 ) Th e p a s t , p r es en t a n d p r oba ble fu t u r e for

com m u n it y ba n k s , J ou r n al of Fin an cial S er v ices R es ear ch , 2 5 , 8 5 -1 3 3 .

Dem ir g u c-K u n t , A., a n d H u izin g a , H ., (1 9 9 8 ) Det er m in a n t s of com m er cia l ba n k in t er es t

m a r g in s a n d p r ofit a bilit y : s om e in t er n a t ion a l evid en ce, W or ld B an k E con om ic R ev iew , 1 3 ,
3 7 9 -4 0 8 .

F la m in i, V., McDon a ld , C.A., a n d Sch u m a ch er , L.B. (2 0 0 9 ) Th e Det er m in a n t s of

Com m er cia l Ba n k P r ofit a bilit y in Su b-Sa h a r a n Afr ica , IM F W or k in g Pap er N o. 0 9 /1 5

Ger os k i, P .A. (1 9 9 0 ) Mod ellin g p er s is t en t p r ofit a bilit y , in Mu eller , D.C. (ed .) T h e Dy n am ics
of Com p an y Pr of it s : A n In t er n at ion al Com p ar is on . Ca m br id g e: Ca m br id g e Un iver s it y P r es s .

Ger os k i, P .A. (1 9 9 0 ) Mod ellin g p er s is t en t p r ofit a bilit y , in Mu eller , D.C. (ed .) T h e Dy n am ics
of Com p an y Pr of it s : A n In t er n at ion al Com p ar is on . Ca m br id g e: Ca m br id g e Un iver s it y P r es s .

Ger os k i, P .A. a n d J a cq u em in , A. (1 9 8 8 ) Th e p er s is t en ce of p r ofit s : a E u r op ea n com p a r is on ,

E con om ic J ou r n al, 9 8 , 3 7 5 -8 9 .

23

Glen , J ., Lee, K . a n d Sin g h , A. (2 0 0 1 ) P er s is t en ce of p r ofit a bilit y a n d com p et it ion in

em er g in g m a r k et s : a t im e s er ies a n a ly s is , E con om ic L et t er s , 7 2 , 2 4 7 -5 3 .

Glen , J ., Lee, K . a n d Sin g h , A. (2 0 0 3 ) Cor p or a t e p r ofit a bilit y a n d t h e d y n a m ics of

com p et it ion in em er g in g m a r k et s : a t im e s er ies a n a ly s is , E con om ic J ou r n al, 1 1 3 , F 4 6 5 F484.

God d a r d , J .A. a n d Wils on , J .O.S., (1 9 9 6 ) P er s is t en ce of p r o t s for UK m a n u fa ct u r in g a n d

s er vice s ect or r m s , S er v ice In d u s t r ies J ou r n al , 1 6 , 1 0 5 1 7 .

God d a r d , J . a n d Wils on , J .O.S., (1 9 9 9 ) P er s is t en ce of p r ofit : a n ew em p ir ica l in t er p r et a t ion ,

In t er n at ion al J ou r n al of In d u s t r ial Or g an iz at ion , 1 7 , 6 6 3 -8 7 .

God d a r d , J ., Moly n eu x , P ., a n d Wils on , J .O.S., (2 0 0 1 ) E u r op ean ban k in g : E f f icien cy ,

t ech n olog y an d g r ow t h . J oh n Wiley , Ch ich es t er , UK .

God d a r d , J ., Moly n eu x , P ., a n d Wils on , J .O.S., (2 0 0 4 a ) Th e p r ofit a bilit y of E u r op ea n ba n k s :

A cr os s -s ect ion a l a n d d y n a m ic p a n el a n a ly s is . M an ch es t er S ch ool, 7 2 , 3 6 3 -3 8 1 .

God d a r d , J ., Moly n eu x , P ., a n d Wils on , J .O.S., (2 0 0 4 b) Dy n a m ics of g r ow t h a n d

p r ofit a bilit y in ba n k in g . J ou r n al of M on ey , Cr ed it an d B an k in g 3 6 , 1 0 6 9 -1 0 9 0 .

God d a r d , J ., Moly n eu x , P ., Wils on , J .O.S. a n d Ta va k oli, M. (2 0 0 7 ) E u r op ea n Ba n k in g : a n

over view , J ou r n al of B an k in g an d Fin an ce, 3 1 , 1 9 1 1 -1 9 3 6 .

God d a r d , J ., McK illop , D.G. a n d Wils on , J .O.S. (2 0 0 8 ) Th e d iver s ifica t ion a n d fin a n cia l
p er for m a n ce of US Cr ed it Un ion s , J ou r n al of B an k in g an d Fin an ce, 3 2 , 1 8 3 6 -4 9

God d a r d , J . a n d Wils on , J .O.S., (2 0 0 9 ) Com p et it ion in ba n k in g : a d is eq u ilibr iu m a p p r oa ch ,

J ou r n al of B an k in g & Fin an ce, for t h com in g .

24

H a n s en , L. (1 9 8 2 ) La r g e s a m p le p r op er t ies of g en er a lized m et h od of m om en t s es t im a t or s ,
E con om et r ica, 5 0 , 1 0 2 9 1 0 5 4 .

H er it a g e F ou n d a t ion (2 0 0 9 ) In d ex of E con om ic Fr eed om , 2 0 0 9 , M et h od olog y f or t h e 1 0

E con om ic Fr eed om s .

H ick s , J . (1 9 3 5 ). An n u a l s u r vey of econ om ic t h eor y : Th e t h eor y of m on op oly , E con om et r ica

3 , 1 -2 0 .

IMF (2 0 0 8 ) In t er n at ion al Fin an cial S t at is t ics . Wa s h in g t on : In t er n a t ion a l Mon et a r y F u n d .

J on es , K .D. a n d Cr it ch field , T. (2 0 0 5 ) Con s olid a t ion in t h e US ba n k in g in d u s t r y : is t h e

lon g , s t r a n g e t r ip a bou t t o en d ? FDIC B an k in g R ev iew , 1 7 , 3 1 -6 1 .

K a u fm a n n D., K r a a y , A. a n d Ma s t r u zzi, M. (2 0 0 5 ) Gover n a n ce Ma t t er s IV: Gover n a n ce

In d ica t or s for 1 9 9 6 -2 0 0 4 . W or ld B an k Policy R es ear ch W or k in g Pap er , N u m ber 3 6 3 0 .

K a u fm a n n D., K r a a y , A. a n d Ma s t r u zzi, M. (2 0 0 8 ) Gover n a n ce Ma t t er s VII: Gover n a n ce

In d ica t or s for 1 9 9 6 -2 0 0 7 . W or ld B an k Policy R es ear ch W or k in g Pap er , N u m ber 4 6 5 4 .

K n a p p , M., Ga r t , A., a n d Ch a u d h r y , M. (2 0 0 6 ) Th e im p a ct of p er s is t en ce a n d m ea n
r ever s ion of ba n k p r ofit a bilit y on p os t -m er g er p er for m a n ce in t h e ba n k in g in d u s t r y ,
J ou r n al of B an k in g an d Fin an ce, 3 0 , 3 5 0 3 -3 5 1 7 .

La P or t a , R ., Lop ez-d e-Sila n es , F ., Sh leifer , A. a n d Vis h n y , R . (1 9 9 8 ) La w a n d F in a n ce,

J ou r n al of Polit ical E con om y , 1 0 6 , 1 1 1 3 5 5 .

La P or t a , R ., Lop ez-d e-Sila n es , F ., Sh leifer , A. a n d Vis h n y , R . (2 0 0 2 ) In ves t or P r ot ect ion

a n d Cor p or a t e Va lu a t ion , J ou r n al of Fin an ce, 5 7 , 1 1 4 7 7 0 .

25

Levin e R ., (2 0 0 3 ) Den y in g F or eig n Ba n k E n t r y Im p lica t ion s for Ba n k In t er es t Ma r g in s ,

Cen t r al B an k of Ch ile W or k in g Pap er s , N o. 2 2 2 .

Levon ia n , M.E . (1 9 9 3 ) Th e p er s is t en ce of ba n k p r ofit s : w h a t t h e s t ock m a r k et im p lies ,

Wor k in g P a p er s in Ap p lied E con om ic Th eor y , N o. 9 3 -1 5 . Sa n F r a n cis co, F ed er a l R es er ve
Ba n k of Sa n F r a n cis co

Lip czy n s k i, J ., Wils on , J .O.S. a n d God d a r d , J . (2 0 0 9 ) In d u s t r ial Or g an iz at ion : Com p et it ion ,

S t r at eg y , Policy . H a r low : F T P r en t ice H a ll.

Ma r a y u m a , N . a n d Od a g ir i, H . (2 0 0 2 ) Does t h e p er s is t en c e of p r ofit s p er s is t ? A s t u d y of
com p a n y p r ofit s in J a p a n , 1 9 6 4 -1 9 9 7 , In t er n at ion al J ou r n al of In d u s t r ial Or g an iz at ion , 2 0 ,
1 5 1 3 -1 5 3 3 .

Ma u d os , J . a n d F er n a n d ez d e Gu eva r a , J . (2 0 0 4 ) F a ct or s a ffect in g t h e in t er es t m a r g in in
t h e ba n k in g s ect or s of t h e E u r op ea n Un ion , J ou r n al of B an k in g an d Fin an ce, 2 8 , 2 2 5 9 -8 1 .

Ma u d os , J . a n d F er n a n d ez d e Gu eva r a , J . (2 0 0 7 ) Th e cos t of m a r k et p ow er in ba n k in g :
s ocia l w elfa r e ver s u s cos t in efficien cy , J ou r n al of B an k in g an d Fin an ce, 3 1 , 2 1 0 3 -2 1 2 6 .

McGa h a n , A.M. a n d P or t er , M.E ., (1 9 9 9 ) Th e p er s is t en ce of s h ock s t o p r ofit a bilit y . R ev iew

of E con om ics an d S t at is t ics 8 1 , 1 4 3 -1 5 3 .

Mu eller , D.C., (1 9 7 7 ) Th e p er s is t en ce of p r ofit s a bove t h e n or m . E con om ica 4 4 , 3 6 9 -3 8 0 .

Mu eller , D.C., (1 9 8 6 ) Pr of it s in t h e lon g r u n . Ca m br id g e Un iver s it y P r es s , Ca m br id g e, UK .

P a n za r , J .C. a n d R os s e, J .N . (1 9 8 7 ). Tes t in g for m on op oly eq u ilibr iu m . J ou r n al of

In d u s t r ial E con om ics , 3 5 , 4 4 3 -4 5 6 .

26

R ola n d , K .P ., (1 9 9 7 ) P r ofit p er s is t en ce in la r g e U.S. ba n k h old in g com p a n ies : a n em p ir ica l

in ves t ig a t ion , E con om ics W or k in g Pap er , 9 7 -2 . Of f ice of t h e Com p t r oller of Cu r r en cy .

R ood m a n , D. (2 0 0 6 ) H ow t o d o x t a bon d 2 : a n in t r od u ct ion t o d iffer en ce a n d s y s t em

GMM in St a t a , Cen t er f or Global Dev elop m en t W or k in g Pap er N u m ber 1 0 3 .

R ood m a n , D. (2 0 0 8 ) A n ot e on t h e t h em e of t oo m a n y in s t r u m en t s , Cen t er f or Global

Dev elop m en t W or k in g Pap er N u m ber 1 2 5 .

Sh a ffer , S., (2 0 0 4 ). P a t t er n s of com p et it ion in ba n k in g , J ou r n al of E con om ics an d B u s in es s ,

5 6 , 2 8 7 -3 1 3 .

St ep h a n , A. a n d Ts a p in , A. (2 0 0 8 ) P er s is t en ce a n d Det er m in a n t s of F ir m P r ofit in
E m er g in g Ma r k et s , CE S IS W or k in g Pap er 1 5 1 .

St ir oh , K . a n d St r a h a n , P .E ., (2 0 0 3 ) Com p et it ive d y n a m ics of d er eg u la t ion : evid en ce for US

ba n k in g , J ou r n al of M on ey , Cr ed it an d B an k in g , 3 5 , 8 0 1 -2 8 .

St ir oh , K .J . (2 0 0 9 ) Diver s ifica t ion in ba n k in g , in Ber g er , A., Moly n eu x , P . a n d Wils on ,

J .O.S. (ed s .) Ox f or d H an d book of B an k in g . Ox for d : Ox for d Un iver s it y P r es s , for t h com in g .

St ir oh , K .J . a n d R u m ble, A. (2 0 0 6 ) Th e d a r k s id e of d iver s ifica t ion : Th e ca s e of US fin a n cia l

h old in g com p a n ies , J ou r n al of B an k in g an d Fin an ce, 3 0 , 2 1 3 1 -2 4 3 2 .

Va n d er Ven n et , R ., (2 0 0 2 ) Cos t a n d p r ofit efficien cy of fin a n cia l con g lom er a t es a n d

u n iver s a l ba n k s in E u r op e, J ou r n al of M on ey , Cr ed it an d B an k in g , 3 4 , 2 5 4 -8 2 .

Wa r in g , G. (1 9 9 6 ) In d u s t r y Differ en ces in t h e P er s is t en ce of F ir m -Sp ecific R et u r n s ,

A m er ican E con om ic R ev iew , 8 6 , 1 2 5 3 -6 5 .

27

28

Table 1 Variable definitions and sources

Variable name

Description and source

Dependent Variable
Return on average equity (ROE)2

Total net income after tax divided by average equity, as reported by Bankscope.

Bank market structure and competition2:

Herfindahl Index

A measure of the degree of concentration in the banking industry, calculated by the sum of the squares of each bank's market
shares of the country of the year.

H-statistic

A measure of the degree of competitiveness of the industry, with less than 0 being a monopoly, less than 1 while larger than
0 being monopolistic competition, and 1 being perfect competition .

Macroeconomic variables5:
Inflation rate

Rate of inflation, calculated by log difference of GDP deflator.

GDP growth

The growth in GDP.

Market Capitalization

Total domestic stock market capitalization divided by GDP

Regulatory restrictions:

Activity Restrictions1

A measure of a bank's ability to engage in the businesses of securities underwriting, insurance, and real, and of the
regulatory restrictiveness of banks to own shares in non-financial firms (sum of Survey of Bank Regulation and Supervision
questions 4.1 through 4.4).Greater values signify more restrictions.

Financial freedom3

An indicator of financial freedom (ranging from 0 to 100). Calculated as 100 minus the financial freedom index of the
Heritage Foundation. Higher values signify less freedom.

29

Capital requirements1

The minimum capital to asset ratio required by the government (Based on question 3.1 of Survey of Bank Regulation and
Supervision).

Fraction of entry denied1

A measure of the number of entry applications denied as a fraction of the number of applications received from domestic
and foreign entities (ratio of Survey of Bank Regulation and Supervision questions 1.9.1 and 1.10.1 to 1.9 and 1.10).

Domestic fraction of entry denied1

A measure of the number of entry applications denied as a fraction of the number of applications received from domestic
entities (ratio of Survey of Bank Regulation and Supervision questions 1.9.1 to 1.9).

Foreign fraction of entry denied1

A measure of the number of entry applications denied as a fraction of the number of applications received from foreign
entities (ratio of Survey of Bank Regulation and Supervision questions 1.10.1 to 1.10).

Institutional environment:
Economic freedom3

An indicator of economic freedom (ranging from 0 to 100). Greater values signify more freedom.

Property rights3

An indicator of the protection of private property rights (ranging from 0 to 100). Greater values signify better protection of
property rights.

KKZ Institution index4

An indicator of the quality of institutional development in the country. Calculated as the average of six indicators: voice and
accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption.

GDP per capita5

Logarithm of GDP per capita expressed in original values.

Data Sources:
1 Barth et al. (2008). Data available at: www.worldbank.org/research/projects/bank_regulation.htm
2 Calculated based on Fitch IBCA's Bankscope Database
3 Economic Freedom Index of the Heritage Foundation

30

4 Kaufmann, Kraay, Zoido-Lobaton (2008)

5 World Development Indicators, World Bank

Table 2 Summary statistics for ROE by region and development.

Region
Latin America and Caribbean
East Asia & the Pacific
North America
West Europe
East Europe
Middle East & North Africa
Sub-Saharan Africa
South Asia
Advanced Countries
Developed Countries
Overall

Number of countries
16
11
1
15
11
2
6
3

ROE
10.07
1.06
12.76
7.02
11.47
7.10
13.22
15.93

19
46
65

6.51
10.87
10.10

31

Table 3 Summary statistics for the persistence of profit, and covariates

Persistence of profit, j

0.429

Standard
Deviation
0.243

Inflation rate

0.078

0.129

62

Market capitalization

0.546

0.643

59

GDP growth

0.040

0.018

62

Herfindahl-Hirschman Index

0.177

0.135

60

Rosse-Panzar H-statistic

0.553

0.255

62

Activity restrictions

2.554

0.650

56

Mean

Number of countries
64

Capital requirements

0.089

0.014

55

Financial freedom

46.393

15.568

61

Total fraction of entry denied

0.070

0.135

48

Domestic fraction of entry denied

0.093

0.194

31

Foreign fraction of entry denied

0.057

0.131

42

Economic freedom index

63.452

9.000

61

KKZ Index

0.388

0.910

63

Property rights Index

59.061

23.035

61

GDP per capita

8.572

1.463

61

32

Table 4 Correlation Matrices for the explanatory variables.

Inflation

Inflation
Market
capitalization
GDP growth
HHI
H-statistic
Activity
restrictions
Captial
requirements
Financial
freedom
Total entry
denied

Market
capitalization

GDP
growth

HHI

Hstatistic

Activity
restrictions

Captial
requirements

Financial
freedom

Total
entry
denied

1.00

-0.28

1.00

0.03
0.05
0.68
-0.01
0.92
0.08
0.54

-0.19
0.15
-0.14
0.30
-0.06
0.64

0.11
0.41
-0.16
0.23

1.00
0.06
0.66

1.00

0.09

-0.41

0.13

0.11

-0.07

0.50

0.00

0.36

0.43

0.63

0.54

-0.39

0.18

0.04

-0.08

0.03

0.00

0.00

0.19

0.80

0.55

0.84

0.23

-0.51

0.30

0.15

0.00

0.43

0.32

0.08

0.00

0.02

0.26

0.97

0.00

0.02

-0.02

-0.15

0.25

0.10

0.05

0.16

0.06

0.31

0.88

0.31

0.09

0.53

0.73

0.28

0.68

0.04

1.00

1.00

1.00

33

1.00

1.00

Domestic
entry
denied

Foreign
entry
denied

Economic
freedom

KKX

GDP
per
capita

Domestic
entry denied

0.21

-0.04

0.36

0.27

0.84

0.05

0.18

0.01

0.18

0.05

0.51

0.90

0.35
0.95
0.34
0.77
0.00
-0.06
-0.19
0.30
-0.02
0.13
0.16
0.17
0.06
0.73
0.24
0.06 0.71
0.89
0.44
0.34
0.31
Economic
-0.38
0.71
-0.33
0.12
-0.34
-0.54
-0.80
freedom
0.14
0.00
0.00
0.01 0.30
0.36
0.01
0.00
0.00
KKX
-0.28
0.59
-0.38
0.01
-0.46
-0.46
-0.67
0.12
0.03
0.00
0.00 0.37
0.93
0.00
0.00
0.00
GDP per
-0.25
0.56
-0.47
0.08
-0.49
-0.44
-0.67
capita
0.20
0.05
0.00
0.00 0.13
0.52
0.00
0.00
0.00
Notes: p value of each pair of correlation coefficients is reported underneath each correlation coefficient.

0.00

Foreign
entry denied

34

1.00

0.81

0.45

1.00

0.00

0.02

-0.33

-0.42

-0.32

0.02

0.02

0.04

-0.36

-0.38

-0.36

0.79

0.01

0.04

0.02

0.00

-0.42

-0.42

-0.51

0.75

0.91

0.00

0.02

0.00

0.00

0.00

1.00

1.00

1.00

Table 5 First-stage estimation results: Short-run persistence of profit estimates and profit rates (ROE) by country
Country

Country
type

Argentina
Australia
Austria
Bahamas
Bangladesh
Belgium
Bosnia and Herzegovina
Brazil
Bulgaria
Cayman Islands
Chile
China
Colombia
Costa Rica
Croatia
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt, Arab Rep.
France
Germany
Guatemala
Honduras

DC
AC
AC
DC
DC
AC
DC
DC
DC
DC
DC
DC
DC
DC
DC
AC
DC
AC
DC
DC
DC
AC
AC
DC
DC

Region

No.of
banks

Latin America and Caribbean

East Asia & the Pacific
West Europe
Latin America and Caribbean
South Asia
West Europe
East Europe
Latin America and Caribbean
East Europe
Latin America and Caribbean
Latin America and Caribbean
East Asia & the Pacific
Latin America and Caribbean
Latin America and Caribbean
East Europe
East Europe
East Europe
West Europe
Sub-Saharan Africa
Latin America and Caribbean
Sub-Saharan Africa
West Europe
West Europe
Latin America and Caribbean
Latin America and Caribbean

94
26
248
16
31
62
23
151
22
16
34
70
27
45
41
15
24
104
33
33
30
343
2123
32
20

No.
of
obs
543
87
1361
89
198
344
124
861
132
82
197
345
169
208
226
71
130
636
175
218
181
2022
12178
205
122

35

ROE
Mean
-3.29
11.52
7.10
19.83
17.94
9.80
6.28
14.14
13.15
11.29
9.26
12.78
9.39
13.14
8.03
16.17
9.53
10.70
9.92
12.21
8.49
9.17
5.41
12.14
11.27

ROE
Std.
Dev.
37.14
21.86
8.08
17.67
17.03
19.07
10.09
23.34
16.33
11.48
10.76
10.08
30.87
7.14
12.92
28.65
18.78
7.92
28.90
12.79
18.43
19.08
5.57
14.46
8.90

Lambda
0.164
0.255
0.477
0.353
0.284
0.539
0.525
0.311
0.392
0.613
0.400
0.570
0.324
0.887
-0.061
0.508
0.201
0.488
-0.034
0.169
0.517
0.446
0.178
0.808
0.723

Lambda
Std.
Err.
0.008
0.085
0.039
0.098
0.034
0.004
0.033
0.021
0.008
0.046
0.005
0.025
0.003
0.016
0.002
0.011
0.003
0.010
0.002
0.009
0.002
0.024
0.017
0.008
0.016

Hansenp

AR(2)

0.302
0.477
0.570
0.988
0.192
0.522
0.474
0.102
0.444
0.999
0.474
0.823
0.957
0.866
0.601
0.990
0.998
0.105
0.863
0.301
0.828
0.331
0.000
0.803
0.599

0.546
0.107
0.294
0.811
0.547
0.313
0.818
0.220
0.387
0.451
0.727
0.449
0.832
0.230
0.136
0.102
0.990
0.102
0.286
0.135
0.031
0.002
0.614
0.866

Hong Kong, China

Hungary
India
Indonesia
Ireland
Italy
Japan
Kenya
Korea, Rep.
Latvia
Lebanon
Luxembourg
Malaysia
Mexico
Netherlands
Nigeria
Norway
Pakistan
Panama
Paraguay
Peru
Poland
Portugal
Romania
Russian Federation
Senegal
Singapore
Spain
Sweden

DC
DC
DC
DC
AC
AC
AC
DC
DC
DC
DC
AC
DC
DC
AC
DC
AC
DC
DC
DC
DC
DC
AC
DC
DC
DC
DC
AC
AC

East Asia & the Pacific

East Europe
South Asia
East Asia & the Pacific
West Europe
West Europe
East Asia & the Pacific
Sub-Saharan Africa
East Asia & the Pacific
East Europe
Middle East & North Africa
West Europe
East Asia & the Pacific
Latin America and Caribbean
West Europe
Sub-Saharan Africa
West Europe
South Asia
Latin America and Caribbean
Latin America and Caribbean
Latin America and Caribbean
East Europe
West Europe
East Europe
East Europe
Sub-Saharan Africa
East Asia & the Pacific
West Europe
West Europe

34
23
77
62
25
671
758
36
21
21
37
126
42
38
46
58
105
26
71
20
18
48
24
24
695
32
16
92
91

145
130
476
338
127
1863
4711
195
141
143
182
702
222
222
219
309
420
158
321
120
107
202
106
147
2341
138
71
428
466

36

10.82
12.65
15.36
10.99
9.43
7.13
-1.94
8.50
10.34
15.76
7.18
12.86
12.12
4.96
11.20
23.84
8.64
15.17
15.65
14.56
8.43
8.65
9.91
4.31
12.44
3.94
11.05
8.73
7.91

12.20
22.01
12.47
46.15
9.51
7.91
19.06
20.65
42.61
13.78
17.01
12.46
12.72
18.42
11.20
22.31
5.17
25.66
16.29
18.97
14.49
14.90
9.95
22.51
11.83
26.95
21.23
13.76
5.00

0.228
0.709
0.477
0.038
0.779
0.464
0.132
0.194
-0.296
0.720
0.790
0.425
0.122
0.512
0.719
0.316
0.375
0.578
0.377
0.573
0.328
0.594
0.482
0.290
0.315
0.526
0.243
0.531
0.118

0.002
0.003
0.003
0.002
0.011
0.029
0.031
0.003
0.001
0.021
0.038
0.035
0.006
0.001
0.005
0.014
0.001
0.002
0.015
0.014
0.048
0.008
0.009
0.014
0.020
0.001
0.044
0.015
0.023

0.754
0.929
0.628
0.310
0.850
0.272
0.143
0.897
0.408
0.359
0.978
0.439
0.944
0.625
0.785
0.801
0.461
0.857
0.417
0.968
1.000
0.972
0.999
0.733
0.172
0.596
0.803
0.332
0.065

0.962
0.113
0.853
0.685
0.623
0.623
0.471
0.947
0.244
0.264
0.137
0.614
0.553
0.453
0.277
0.142
0.499
0.153
0.330
0.282
0.028
0.553
0.361
0.484
0.290
0.235
0.553
0.600

Switzerland
Taiwan, China
Tanzania
Thailand
Tunisia
Ukraine
United Kingdom
Uruguay
United States
Venezuela
Vietnam

AC
DC
DC
DC
DC
DC
AC
DC
AC
DC
DC

West Europe
East Asia & the Pacific
Sub-Saharan Africa
East Asia & the Pacific
Middle East & North Africa
East Europe
West Europe
Latin America and Caribbean
North America
Latin America and Caribbean
East Asia & the Pacific

442
46
15
21
15
33
145
44
738
49
22

2392
301
52
135
94
188
692
195
4319
268
128

8.18
-0.80
19.99
-4.29
6.95
11.71
9.13
-9.10
12.76
25.37
10.38

7.51
17.44
26.02
55.57
7.12
11.34
13.47
82.89
9.27
18.63
14.59

0.725
0.325
0.254
0.967
0.630
0.454
0.684
0.589
0.680
0.391
0.580

0.032
0.022
0.156
0.002
0.028
0.017
0.017
0.010
0.041
0.025
0.010

0.116
0.356
0.077
0.403
0.840
0.599
0.455
0.692
0.098
0.358
0.479

0.861
0.101
0.259
0.034
0.796
0.198
0.665
0.004
0.593
0.271

Note: is estimated by applying the system GMM estimator to Equation (4), with the profit rates being the ROEs (return-on-average equity) as reported by
BankScope. AC represents advanced countries, while DC represents developing countries.. 'Hansenp' is the p-value for the Hansen test for the validity of
the over-identifying restrictions in the System GMM estimation. 'AR(2)' is the p-value for the 2nd-order autocorrelation in the residuals from the System GMM
estimation.

37

Table 6 Frequency distribution of estimated short-run persistence coefficients

a) By frequency interval
Number of countries

Frequency interval
AC

DC

all

<0

5%

0 - 0.2

12%

0.2 - 0.4

11

18

28%

0.4 -0.6

17

22

34%

0.6- 1

14

22%

Sum

19
0.442

46
0.426

65
0.430

100%

Mean lambda
b) By region
Region

Number of countries

Lambda

Latin America and Caribbean

16

0.470

East Asia & the Pacific

11

0.288

North America

0.680

West Europe

15

0.495

East Europe

11

0.422

Middle East & North Africa

0.710

Sub-Saharan Africa

0.296

South Asia

0.446

Note: j is the estimated short-run persistence of profit coefficient

38

Table 7: Second-stage regression results, determinants of the persistence of profit

Macroeconomic
conditions

Macroeconomic conditions and bank regulation

(1)
0.858*
(2.82)
2.512**
(2.19)

(2)
0.714**
(2.44)
1.881
(1.44)

(3)
1.115
(1.93)
2.305
(1.25)

(4)
1.294
(1.77)
-0.252
(-0.27)

(5)
0.783
(1.51)
2.613
(1.25)

(6)
1.041***
(3.97)
-3.387
(-1.59)

(7)
0.763
(2.02)
1.756
(1.28)

Market
capitalization

0.0137

0.0758

0.00322

-0.0836*

0.0298

-0.0517

0.0637

GDP growth

(0.19)
-20.91**
(-2.19)

(1.28)
-21.35*
(-2.78)
1.871***
(3.75)

(0.04)
-23.29
(-1.66)

(-3.01)
4.167
(0.75)

(0.25)
-21.05**
(-2.34)

(-0.25)
-15.39
(-1.85)

(0.98)
-21.55**
(-2.33)

Constant
Inflation rate

Total entry denied

Activity
restrictions

-0.0711
(-0.72)

Capital
requirements

-11.34
(-1.09)

Financial freedom

0.00133
(0.15)

Domestic entry
denied

0.964**
(2.47)

Foreign entry
denied

1.804**
(2.54)

39

N
adj. R-sq

61
0.482

46
0.476

53
0.434

52
0.826

59
0.417

31
0.931

40
0.291

Note: Dependent variable is coefficients estimated from the first stage system GMM estimator. Since the dependent variable is an
estimated parameter, all equations are weighted with the inverse of the standard errors of the dependent variable. The constant variable is
suppressed; however, the inverse of standard error of dependent variable is used instead. OLS with robust standard errors is applied in each
equation and t statistics of estimated coefficients are shown in parentheses.*,**,*** represents 10, 5, and 1 percent significant level,
respectively

Institutional and External Governance

Market
Structure

Competition

All

(8)
3.307
(1.91)
1.383
(0.88)

(9)
1.096*
(3.08)
1.830**
(2.06)

(10)
2.632**
(2.62)
1.892**
(2.32)

(11)
1.794*
(3.13)
0.554
(0.45)

(12)
0.663
(1.87)
2.694**
(2.26)

(13)
1.355*
(3.24)
1.627
(1.53)

(14)
-0.115
(-0.20)
0.560
(0.86)

Market
capitalization

0.298

0.0842

0.0932

0.106

0.0260

-0.0366

-0.107*

GDP growth

(1.52)
-25.89*
(-3.05)

(1.28)
-24.80**
(-2.46)

(1.46)
-27.17*
(-2.72)

(1.85)
-25.74*
(-3.07)

(0.33)
-19.22
(-1.98)

(-0.53)
-22.94**
(-2.64)

(-2.74)
2.181
(0.41)
-0.00136
(-0.00)

Constant
Inflation rate

Total entry denied

Economic freedom

-0.0360
(-1.47)

40

KKZ

-0.211
(-1.60)

GDP per capita

-0.170
(-1.99)

Property rights

-0.0106**
(-2.01)

HHI

0.514
(1.11)

H-statistic
N
adj. R-sq

59
0.526

60
0.541

61
0.593

59
0.554

61
0.496

-0.348
(-1.30)
59
0.565

0.0127
(2.45)
1.035***
(3.64)
-1.100***
(-6.88)
44
0.795

Note: Dependent variable is coefficients estimated from the first stage system GMM estimator. Since the dependent variable is an estimated
parameter, all equations are weighted with the inverse of the standard errors of the dependent variable. The constant variable is suppressed;
however, the inverse of standard error of dependent variable is used instead. OLS with robust standard errors is applied in each equation and t
statistics of estimated coefficients are shown in parentheses.*,**,*** represents 10, 5, and 1 percent significant level, respectively

41

42

43