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The fat years: the structure and profitability of the US banking sector in the pre-crisis period

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  • Fiona Tregenna

Abstract

Bank profitability in the USA was extremely high in the pre-crisis period, yet this did not prevent the current crisis. It has become clear that these profits were on shaky grounds and also that bank profits were not used to buttress banks' capital bases. This paper analyses the effects of structure on profitability from 1994 to 2005. Bank-level panel data are used to test the effects of concentration, market power, bank size and operational efficiency on profitability. Efficiency is not found to be a strong determinant of profitability, suggesting that banks' high profits during this period were not 'earned' through efficient performance. Robust evidence is found that concentration increases bank profitability. This holds even when the largest banks are excluded from the sample, suggesting that the relationship between concentration and profitability acts in a generalised structural way and that the higher profits arising from concentration are at the expense of the rest of the economy. The analysis points to various policy implications relevant to the current crisis, in particular in terms of the legitimacy of expectations of the restoration of pre-crisis profit rates and the need for much stronger regulation of the banking sector, especially in terms of the structure of the sector, pricing behaviour and use of profits. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Cambridge Journal of Economics.

Volume (Year): 33 (2009)
Issue (Month): 4 (July)
Pages: 609-632

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Handle: RePEc:oup:cambje:v:33:y:2009:i:4:p:609-632

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Cited by:
  1. Jon D. Wisman, 2012. "Wage Stagnation, Rising Inequality and the Financial Crisis of 2008," Working Papers 2012-01, American University, Department of Economics.
  2. Jones, Jeffrey S. & Miller, Scott A. & Yeager, Timothy J., 2011. "Charter value, Tobin's Q and bank risk during the subprime financial crisis," Journal of Economics and Business, Elsevier, vol. 63(5), pages 372-391, September.
  3. Sergio SANFILIPPO AZOFRA & Maria CANTERO SAIZ & Begona TORRE OLMO & Carlos LOPEZ GUTIERREZ, 2013. "Financial Crises, Concentration and Efficiency: Effects on Performance and Risk of Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 537-558, December.
  4. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  5. HOMMA Tetsushi & TSUTSUI Yoshiro & UCHIDA Hirofumi, 2012. "Firm Growth and Efficiency in the Banking Industry: A new test of the efficient structure hypothesis," Discussion papers 12060, Research Institute of Economy, Trade and Industry (RIETI).
  6. Songül KAKÝLLÝ ACARAVCI & Ahmet Ertugrul ÇALIM, 2013. "Turkish Banking Sector’s Profitability Factors," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 27-41.
  7. Jon D. Wisman & Barton Baker, 2010. "Rising Inequality and the Financial Crises of 1929 and 2008," Working Papers 2010-10 JEL classificatio, American University, Department of Economics.
  8. Sufian, Fadzlan & Habibullah, Muzafar Shah, 2012. "Globalizations and bank performance in China," Research in International Business and Finance, Elsevier, vol. 26(2), pages 221-239.
  9. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  10. Donald Robertson & Vasilis Sarafidis, 2013. "IV Estimation of Panels with Factor Residuals," Cambridge Working Papers in Economics 1321, Faculty of Economics, University of Cambridge.
  11. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
  12. Hong Liu & Phil Molyneux & John O. S. Wilson, 2013. "Competition And Stability In European Banking: A Regional Analysis," Manchester School, University of Manchester, vol. 81(2), pages 176-201, 03.
  13. Ali Mirzaei, 2013. "Bank Performance during the Financial Crisis 2007-2010," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 12(1), pages 27-44, June.

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