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

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.