Compositional Dynamics and the Performance of the U.S. Banking Industry

25 Pages Posted: 26 Apr 2000

See all articles by Kevin J. Stiroh

Kevin J. Stiroh

Federal Reserve Bank of New York

Date Written: September 2000

Abstract

As the U.S. banking industry continuously evolves, changes in industry composition have a direct impact on the aggregate performance of the industry. This paper presents a new decomposition framework for commercial banks and shows that both firm-level changes and dynamic reallocation effects - due to increased market share of successful banks, exit of poor performers, and new entrants - made substantial contributions to changes in profitability and capitalization of the U.S. banking industry from 1976 to 1998. In periods of declining profits, these reallocations were particularly important, increasing industry return on equity by several percentage points in the late 1980s and stabilizing industry performance. In the late 1990s, however, the reallocation effects turned negative and lowered industry profits as growing banks showed declining profits on net. These results provide a new perspective for understanding the impact of changes in competition on the performance of the U.S. banking industry.

JEL Classification: G21, L11

Suggested Citation

Stiroh, Kevin J., Compositional Dynamics and the Performance of the U.S. Banking Industry (September 2000). FRB of New York Staff Report No. 98. Available at SSRN: https://ssrn.com/abstract=221949 or http://dx.doi.org/10.2139/ssrn.221949

Kevin J. Stiroh (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6633 (Phone)
(212) 720-8363 (Fax)

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