Estimating the Determinants of Bank Profitability: Comparative Study for EU and US Banks

Abstract Background/Purpose This paper examines the significant differences in market returns between the US and EU banking sectors following the 2008 financial crisis. The analysis reveals that the profitability of US banks, measured by return on equity, is higher than that of European banks, partially explaining the observed differences in returns. Methodology The study employs two unbalanced panels of data for EU and US banks covering the period 2008-2022. Static and dynamic estimators were used to identify significant determinants of bank profitability that include the impact of the profitability trend in the observed period on future profitability. Results Based on a sample of 250 banks, operational efficiency, diversification, and risk were found to influence the profitability of banks in both regions. For European banks, past profitability, the share of deposits and loans in assets, and inflation were also found to exert influence. On the other hand, American banks exhibit a higher predictive power for these variables, confirming the differences in determinants between the two markets. Although risk partially explains the higher profitability of American banks, other results did not confirm the original hypothesis. Conclusion The main contribution of the paper is a direct comparison of the determinants of profitability for EU and US banks using static and dynamic models in the post-2008 financial crisis period. In addition, the existing methodology of static models with dynamic estimators has been extended by WLS models and robust estimators, and it was shown that there are certain determinants influencing their profitability that should be extended and subsequently examined.