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

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.

Suggested Citation

  • Allen N. Berger & Seth D. Bonime & Daniel M. Covitz & Diana Hancock, 1999. "Why are bank profits so persistent: the roles of product market competition, informational opacity, and regional/macroeconomic shocks," Finance and Economics Discussion Series 1999-28, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1999-28
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    References listed on IDEAS

    as
    1. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    2. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    3. 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.
    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.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Banking market ; Bank profits;

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