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Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks

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  • Berger, Allen N.
  • Bonime, Seth D.
  • Covitz, Daniel M.
  • Hancock, Diana

Abstract

We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistent performance at the high and low ends of the distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of performance; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that performance remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.
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  • Berger, Allen N. & Bonime, Seth D. & Covitz, Daniel M. & Hancock, Diana, 2000. "Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1203-1235, July.
  • Handle: RePEc:eee:jbfina:v:24:y:2000:i:7:p:1203-1235
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    1. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    2. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-580.
    3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    4. Mueller, Dennis C, 1977. "The Persistence of Profits above the Norm," Economica, London School of Economics and Political Science, vol. 44(176), pages 369-380, November.
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