Factors affecting U.S. Banking Performance: Evidence From the 2007-2013 Financial Crisis

Understanding how bank profitability factors behave under financial crises can provide useful insights into addressing the bank failure problem. The paper determined, separately, the effects of bank specific factors and factors outside of the bank’s control on bank profitability in the United States during the 2007-2013 financial crisis. The results, estimated by using generalized least square, showed that the bank market related factors, loan marketing strategies and portfolio diversification, explained most of the variability in bank profitability (about twenty eight percent) compared with bank specific factors, interest rate risk, credit risk, liquidity risk and capitalization risks, which explained about twenty three percent and macroeconomic/vocational factors, per capita income, bank size and bank locations, which explained about eleven percent of the variability in bank profitability. Among variables studied, loan marketing strategies and portfolio diversification, and interest rate risk and capitalization management strategies had a positive effect, while credit risk had a negative effect on profitability. Small banks appeared to be more profitable than large banks