Dynamics of Growth and Profitability in Banking

JA Goddard, P Molyneux, John Ogilvie Stephen Wilson

Research output: Contribution to journalArticlepeer-review

233 Citations (Scopus)

Abstract

Dynamic panel and cross-sectional regressions are used to estimate growth and profit equations for a sample of commercial, savings, and co-operative banks from five major European Union countries during the mid-1990s. Methodologically, the paper unifies the growth and profit strands in the previous empirical literature. The growth regressions reveal little or no evidence of mean-reversion in bank sizes. Profit is an important prerequisite for future growth. Banks that maintain a high capital-assets ratio tend to grow slowly, and growth is linked to macroeconomic conditions. Otherwise, there are few systematic influences on bank growth. The persistence of profit appears higher for savings and co-operative banks than for commercial banks. Banks that maintain high capital-assets or liquidity ratios tend to record relatively low profitability. There is some evidence of a positive association between concentration and profitability, but little evidence of a link between bank-level x-inefficiency and profitability.

Original languageEnglish
Pages (from-to)1069-1090
Number of pages22
JournalJournal of Money, Credit and Banking
Volume36
Issue number6
DOIs
Publication statusPublished - Dec 2004

Keywords

  • law of proportionate effect
  • persistence of profit
  • European banking
  • PRICE-CONCENTRATION RELATIONSHIP
  • MARKET-POWER
  • PANEL-DATA
  • FINANCIAL INSTITUTIONS
  • BUILDING SOCIETIES
  • PROFIT FUNCTION
  • EFFICIENCY
  • PERSISTENCE
  • CONSOLIDATION
  • DETERMINANTS

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