BANK PERFORMANCE AFTER THE FINANCIAL CRISIS: Have the internal profitability determinants changed?

Abstract

The purpose of this thesis is to study bank profitability after the recent financial crisis, which took place in 2007–2009. The research problem can be stated in two sentences. First, which internal determinants explain bank profitability after the financial crisis? And second, have the underlying internal bank profitability determinants changed between before the financial crisis and after the financial crisis periods?

This study is based on the US bank data acquired from Bureau van Dijk BankScope database. In addition to US banks, also foreign banks’ US based holding companies are considered in the sample selection. The focus of this study is on large and systemically important banks from which sufficient data is available. The chosen sample criteria leads to total sample size of 53 banks. The sample periods are 2002–2006 and 2010–2014, where years 2007–2009 are identified as financial crisis years. The method of the study is panel regression analysis. More specifically, OLS and OLS Fixed Effects regressions are estimated, and the regression results are further assessed with Wald tests.

The results of this study show that majority of the variables chosen for the panel regressions explain bank profitability before and after the financial crisis. Furthermore, the results show that the chosen bank profitability determinants differ between pre– and post–financial crisis periods. Non-interest income and operational efficiency explain bank performance similarly between the two examination periods. Banks that generate higher share of their income as non-interest income are relatively more profitable. Banks that control their costs and are more efficient are also more profitable. Liquidity risk and bank’s business growth do not explain bank profitability in the pre–financial crisis period. After the financial crisis, both determinants are statistically highly significant. Higher liquidity risk leads to lower profitability. Banks that grow faster tend to be more profitable in after the financial crisis period. In addition to these findings, some of the variables explain either of the two selected dependent variables of this study alone.