Determinants of Profitability of Listed Banks in the United States: A Panel Data Approach

Purpose: This paper explores the relationship between financial performance in terms of profitability and the determinants for listed banks in the United States since the end of 2014 when banks under the Basel III framework are required to maintain minimum capital ratios to ensure there is sufficient capital to withstand and absorb operating losses to ensure the overall stability of the financial system through improved risk mechanisms. Design/Methodology/Approach: The study implements a panel data regression methodological approach. Data are sourced from annual financial statements of listed U.S. banks for the period 2015 to 2019 representing the new banking regulatory capital ratio regime before the onset of the Covid-19 pandemic. Determinants of profitability in the specific context of this study are the factors that cause or significantly influence the nature or occurrence of the financial performance regarding the profitability of listed banks. Findings: Key findings reveal that under the revised regulatory framework, the leverage capital ratio is significantly positively correlated to bank profitability result in the unintended consequence of banks being disincentivized in participating in lower-risk, lower-limit return activities, such as U.S. Treasury intermediation; and incentivized to engage in higher-risk, higher return activities without a commensurate increase in capital requirements. Other findings are the log of assets variable is significantly positively related to bank profitability, and the unemployment variable is highly significantly negatively correlated with bank profitability. There is no evidence of systematic opportunistic management of regulatory risk-based capital ratios. Surprisingly, the net interest margin variable, inflation, and GDP variables are not significant; plausible explanations are offered for these noted anomalies. Practical Implications: The study is important because this topic is under researched and needs to be better understood by the regulators, standard setters, practitioners, and academics, especially as the regulatory standard setting, reviews and tests are ongoing; and U.S. listed banks play a critical role in the global economy evidenced by events such as the 2008 financial crisis. Originality/Value: The study offers guidance on how regulators, standard setters, and practitioners can better manage risk and uncertainty in banks overall.