Determinants of the Profitability of the US Banking Industry

Abstract

This paper seeks to examine the determinants of the profitability of the US banks during the period 1995-2007. The empirical analysis combines bank specific (endogenous) and macroeconomic (exogenous) variables through the GMM system estimator. The empirical findings document a negative link between the capital ratio and the profitability, which supports the notion that banks are operating over-cautiously and ignoring potentially profitable trading opportunities. Additionally, they point to a non-monotonic relationship between the capital ratio and profitability, supporting the efficiency-risk and franchise-value hypotheses. The analysis also records that economies of scale do not occur if one takes into consideration the size of the bank.