Abstract
The purpose of this paper is to investigate the relationship between profitability of the Lithuanian banking sector and its internal and external determinants. We use the panel error correction model to assess long-term and short-term determinants of items from bank income statements (net interest income, net fee and commission income and operating expenses). The results of the pooled mean group estimator show that bank size and real GDP are the main determinants in the long-term. Meanwhile, empirical examination suggests various variables as short-term determinants of income statement items. The pooled mean group estimation technique and the analysis of separate income statement items enable us to have a better insight into the Lithuanian banking sector and determinants of its revenue and expenses.
Highlights
The banking sector plays an important part in the economy
The results of the pooled mean group estimator show that bank size and real gross domestic product (GDP) are the main determinants in the long-term
We found that short-term interest rate and credit losses have an influence on net interest income, real export has an impact on net fee and commission income, and compensation per employee has an effect on operating expenses
Summary
The banking sector plays an important part in the economy. As one of the main sources for financing of economic activity, banks may influence business cycles. Bank revenues show fluctuations in time as they depend on the overall economic activity. Bank profitability is a prime determinant of bank stability and lending capacity. A stable banking sector may stimulate the economy and is able to withstand economic shocks. It is important to understand the relationship between bank revenue and macroeconomic variables as it could help assess the stability of a banking sector
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