Determinants of U.S. Commercial Bank Performance: Regulatory and Econometric Issues

Abstract

The purpose of this paper is to identify important determinants of the performance of commercial banks. Two profitability measures and one measure of loss are used as indicators of performance. Each of these measures is related to different types of bank assets and other variables. The choice of these measures and variables is justified by citing several previous studies in the area. Various arguments are also presented to show that these relationships are not linear, have unknown functional forms, and are not stable. To avoid the risk of misspecifying the functional form of the relationships, a wide class of functional forms is employed that may embody the true functional form as a special case even when the specific functional forms considered in previous studies are false. The empirical results obtained from the class approach are compared with those obtained by assuming linear and specific nonlinear relations to study the robustness of the results to departures from specific functional forms. The effects of excluded variables and of errors in measurement are also accounted for in the class approach.

JEL Classification: G21