Abstract
This study empirically explored the relative importance of bank-specific factors on the profitability of banks operating in developed, advanced emerging, secondary emerging and frontier markets (based on the FTSE Group’s classification) from 2002 to 2008. The sample consisted of 6,926 banks in developed countries, 556 banks in advanced emerging countries, 2,103 banks in secondary emerging countries, and 563 banks in frontier markets. As a result of this study, employing multivariate analysis of covariance (MANCOVA), empirical support was provided for the theoretical proposition pursuant to which the importance of bank-specific factors goes countercyclically with the business cycle. This can be explained by a reduction in agency problems and by the convergence of expectations of all market participants with respect to the overall economic situation in the periods of high economic growth. In contrast, in periods of financial distress, the level of uncertainty increases sharply, which leads to a substantial squeezing in profit margins. DOI: 10.5901/mjss.2015.v6n3p277
Highlights
The main purpose of this study is to examine the effect of bank-specific factors on performance of banks operating in economies characterized by different levels of regulatory, financial system, and economic development
This study argues that due to the global tendency towards the standardization of banking practices triggered by elaboration of the Basel requirements, the level of importance of internal factors for bank performance is mostly associated with the business cycle than with anything else
The choice of bank-specific factors is driven primarily by the CAMEL rating system developed by the US Federal Deposit Insurance Corporation (FDIC) for “early identification of problems in banks’ operations” (Hunjak and Jakovþeviü 2001, 150) and which is used by many banking analysts in analyzing the performance of banks (Balteú and Rodean 2014, 134)
Summary
The main purpose of this study is to examine the effect of bank-specific (internal) factors on performance of banks operating in economies characterized by different levels of regulatory, financial system, and economic development. This study argues that due to the global tendency towards the standardization of banking practices triggered by elaboration of the Basel requirements, the level of importance of internal factors for bank performance is mostly associated with the business cycle than with anything else. The effect of these factors is countercyclical to the level of economic activity due to divergence of expectations of market participants, an increase in agency problems and default rates in periods of economic downturn. Understanding of how bank performance is determined by internal factors contingent upon the stage of the economic activity in any market can serve as a guide for regulators concerning when any regulatory requirements should be imposed on banking organizations to ensure at least stability of the banking sector in particular and the whole economy in general
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