Why are Bank Profits so Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks

37 Pages Posted: 4 Aug 1999

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Seth D. Bonime

PepsiCo; Yale School of Management

Daniel M. Covitz

Federal Reserve Board - Division of Research & Statistics

Diana Hancock

Federal Reserve Board - Division of Research and Statistics

Abstract

We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistent performance at the high and low ends of the distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of performance; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that performance remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.

JEL Classification: G21, G28, L51, L89

Suggested Citation

Berger, Allen N. and Bonime, Seth D. and Covitz, Daniel M. and Hancock, Diana, Why are Bank Profits so Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks. FEDS Working Paper No. 99-28. Available at SSRN: https://ssrn.com/abstract=171727 or http://dx.doi.org/10.2139/ssrn.171727

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Seth D. Bonime

PepsiCo

700 Anderson Hill Road
Purchase, NY 10577
United States

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Daniel M. Covitz

Federal Reserve Board - Division of Research & Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States
202-452-5267 (Phone)
202-452-5295 (Fax)

Diana Hancock

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

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