Title: Industry-specific and regional economic determinants of US commercial banking profitability

Authors: Amit Ghosh

Addresses: Department of Economics, Illinois Wesleyan University, 1312 Park Street, P.O. Box 2900, Bloomington, IL 61702-2900, USA

Abstract: Understanding the determinants of bank profits is extremely crucial for bank executives in making their financing, investment and diversification decisions. The issue bears relevance not only for banks in terms of their corporate risk management strategy, but also for bankers associations, state and federal regulators, and central banks. Using state-level data and employing both fixed effects and dynamic-GMM estimation techniques I examine banking-industry specific as well as region economic determinants of commercial bank profitability in the USA across all 50 states and Washington, DC spanning 1966-2014. Greater capitalisation and diversification increase profits while lower liquidity risks, higher costs, inferior credit quality and deposit growth decrease profits. Moreover, higher state real GDP and personal income growth rates, state HPI and inflation rates increase profits, while higher unemployment rates lower profits. Finally, I do not find any decline in the sensitivity of bank profits to regional economic conditions post Riegle-Neal Act.

Keywords: bank profits; diversification; capital management; state-level analysis; static panel estimation; dynamic panel estimation; Riegle-Neal Act; USA; United States; industry-specific economic determinants; regional economic determinants; US commercial banks; banking profitability; banking industry.

DOI: 10.1504/AJFA.2016.080733

American Journal of Finance and Accounting, 2016 Vol.4 No.3/4, pp.261 - 283

Received: 29 Jun 2016
Accepted: 26 Oct 2016
Published online: 05 Dec 2016 *

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