Abstract
This study investigates the determinants of the profitability of U.S. banks. Employing quarterly data, this paper further examines the historical and recent trends for all U.S. banks from 1996 to 2019 in the relationship between return and assets (ROA) and other bank internal (or endogenous) profitability contributors such as net interest margin (NIM), loan loss reserves, ratio of non-performing loans to gross loans, and external (or exogenous) macroeconomic variables, such as the 30-year average mortgage rate, Gross Domestic Product (GDP) economic growth rate, unemployment rate, interest rate, inflation rate and openness (i.e., exports + imports/GDP) by using the Generalized Method of Moments (GMM) estimator technique. The results reveal that bank-specific variables, including net interest margin, loan loss reserves and non-performing loans, have a significant impact on bank profitability in the United States. Similarly, the results show that macroeconomic variables, namely the average mortgage rate, economic growth, and unemployment rate, exert significant effects on the U.S. banks’ profitability. The results further indicate that changes in openness are detrimental to bank profitability. The implications are discussed.
Highlights
U.S banks serve as one of the important vehicles that channel funds from saving units to investing units in the financial system
This study investigates the relationship between return on assets (ROA) and other bank internal profitability contributors such as net interest margin (NIM), loan loss reserves, ratio of non-performing loans to gross loans, and external macroeconomic variables, such as the 30-year average mortgage rate, Gross Domestic Product (GDP) economic growth rate, unemployment rate, interest rate, inflation rate and openness by using the Generalized Method of Moments (GMM) estimator technique
2 –3.59 –3.04 –2.75 where Return on Assets (ROA) represents return on assets, AMR is the average mortgage rate, GR stands for GDP growth rate, INF represents inflation rate, LLR stands for loan loss reserves, NPL
Summary
U.S banks serve as one of the important vehicles that channel funds from saving units to investing units in the financial system. Note: ***, **, and * indicate 1%, 5% and 10% levels of significance, respectively; AMR = Average mortgage interest rate; GR = GDP growth rate; INF = Inflation rate; LLR = Loan loss reserves; NPL = the ratio of non-performing loans to gross loans; NIM = Net interest margin; OPN = Openness measure; ROA = Return on assets; UR = Unemployment rate. 2 –3.59 –3.04 –2.75 where ROA represents return on assets (proxy for bank profitability), AMR is the average mortgage rate, GR stands for GDP growth rate, INF represents inflation rate, LLR stands for loan loss reserves, NPL is the ratio of non-performing loans to gross loans, NIM is the net interest margin, OPN is the measure of openness (i.e., exports + imports /GDP), and UR is the unemployment rate.
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