Does market structure affect the sensitivity of bank profitability to the business cycle?

Purpose This study aims to investigate how market concentration and business-cycle conditions shape bank profitability across developing and emerging economies. Beyond their individual effects, it examines whether market concentration moderates profitability’s procyclicality and whether this moderation varies by income group. Design/methodology/approach Using aggregate banking-sector data for 118 developing and emerging economies over 2000–2021, the authors estimate dynamic panel models with interaction terms between concentration and cyclical indicators. The authors use the generalized method of moments (GMM) to address endogeneity, unobserved heterogeneity and profit persistence. Robustness checks include alternative concentration measures (five-bank concentration ratio [CR5]) and business-cycle dummies. Findings Bank profitability is procyclical on average – rising during economic upturns. However, the concentration–cycle nexus is development-contingent: in high- and middle-income economies, greater concentration dampens procyclicality, consistent with the concentration–stability hypothesis; in low-income economies, higher concentration amplifies cyclicality, pointing to weaker institutional capacity and governance. These results remain stable across alternative specifications and proxies, including CR5 and business-cycle dummies. Originality/value The study provides large-scale cross-country evidence that the profitability effects of concentration depend on a country’s level of development and financial structure. By combining a long panel with GMM estimation and explicit income-group heterogeneity, it clarifies when consolidation is stabilizing versus destabilizing. The findings offer actionable guidance for competition policy, prudential calibration and governance reforms aimed at strengthening financial resilience in diverse institutional settings.