Determinants of Bank Profitability in Austria. A Micro-Macro Approach

In this study we conducted a panel econometric analysis aimed at testing the most prominent hypotheses in the literature on bank profitability: the structure-conduct-performance hypothesis (SCPH), the efficient-structure hypothesis and the relative-market-power hypothesis. Further, we tested whether Austrian banking markets are, on average, contestable. A newly compiled dataset covering more than 700 Austrian banks ranging over the period from 1995 to 2002 was used to carry out the econometric analyses. On the basis of this extended dataset we found support for the traditional SCPH. In the face of the findings obtained it appears relatively safe to maintain that the Austrian banks do exert, on average, some local market power but the gains in terms of excess profits are rather minor due to low deterrence powers of the incumbent banks. As to policy implications, the study holds that the presented empirical evidence is in accordance with the view that consolidation of the banking sector should primarily progress through domestic banking mergers and acquisitions. This has been the common practice in many OECD countries, including Austria, since the early 1990s.