Do competition and market structure matter for sensitivity of bank profitability to business cycle?

Małgorzata Olszak and Iwona Kowalska
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Iwona Kowalska: Department of Mathematics and Statistical Methods, Faculty of Management

No 12021, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: The aim of this paper is to determine what is the effect of competition on cyclicality of bank profitability. To answer this question we apply robust fixed effects estimator to unbalanced panel of individual bank level data covering the period of 2004-2015 in over 100 countries. In our study we control for market power and market structure, as proxies for competitive environment and for net interest margin (NIM), return on assets (ROA) and return on equity (ROE) to proxy bank profitability. Our results show that decreased competition is related with an increase in procyclicality of net interest margin. This effect, however, does not hold in high-income countries. As for the ROA and ROE we find comparable results, but the effect is not always statistically significant. Market structure does affect profitability in a statistically signficant way, but seems to be important for procyclicality of ROA and ROE. We also find that the link between competition and procyclicality of profitability is non-linear and inversely U-shaped. Thus, both high and low competition intensity may reduce procyclicality of profitability.

Keywords: profitability; procyclicality; competition; market structure (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021
New Economics Papers: this item is included in nep-com and nep-fdg
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