International Business and Economics Research Journal

International Business & Economics Research Journal

Volume 3, Number 6

The Determinants
Of European Bank Profitability
Christos K. Staikouras, (E-mail: [e-mail]), Athens University of Economics and Business, Greece
Geoffrey E. Wood, (E-mail: [e-mail]), City University Business School, United Kingdom

Abstract
The rate of return earned by a financial institution is affected by numerous factors. These factors include elements internal to each financial institution and several important external forces shaping earnings performance. The type of explanation would d etermine possible policy implications and ought to be taken seriously. This paper reviews the literature on bank performance studies and classifies the bank profitability determinants.
The second part of the paper quantifies how internal determinants (“wit hin effects” changes) and external factors (“dynamic reallocation” effects) contribute to the performance of the EU banking industry as a whole in 1994 -1998. We construct OLS and fixed effects models, and the results provide a new perspective for understan ding the impact of changes in competition on the performance of the EU banking industry. The estimation results suggest that the profitability of European banks is influenced not only by factors related to their management decisions but also to changes in the external macroeconomic environment. The results are in contrast to studies that have examined the structure-performance relationship for European banking and find a positive effect of the concentration and/or market share variables on bank profitabilit y.

1. Introduction

A

number of studies have examined bank performance in an effort to isolate the factors that account for interbank differences in profitability. These studies fall generally into several categories. One group has focused broadly on the tie between bank earnings and various aspects of bank operating performance. A second set of

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