Abstract
Following the controversial discussion on the banking industry's performance in Europe and particularly in Germany, this study empirically analyses the main driving forces of banks' and the banking systems' profitability: Using recursive partitioning, the sample of around 3,000 European banks is successively divided by the most discriminatory predictor in as homogenous sub-segments as possible with regard to the dependent variable return on equity. Out of a set of various institutional, structural and bank specific attributes the algorithm chooses predominately the institutional characteristic ownership of savings banks as the most powerful input factor. Banks located in countries with a minimum initial privatisation success indicate a significantly higher profitability than banks resident in countries with publicly dominated savings banks sectors.
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