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

Author

Listed:
  • Ma³gorzata Olszak

    (Department of Banking and Money Markets, Faculty of Management, University of Warsaw)

  • Iwona Kowalska

    (Department of Mathematics and Statistical Methods, 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.

Suggested Citation

  • Ma³gorzata Olszak & Iwona Kowalska, 2021. "Do competition and market structure matter for sensitivity of bank profitability to business cycle?," Faculty of Management Working Paper Series 12021, University of Warsaw, Faculty of Management.
    • Handle: RePEc:sgm:fmuwwp:12021
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    References listed on IDEAS

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    More about this item

    Keywords

    profitability; procyclicality; competition; market structure;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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