DETERMINANTS OF THE PROFITABILITY OF THE U.S. BANKING INDUSTRY DURING THE FINANCIAL CRISIS

This research focuses on the determinants of the profitability of the US banking industry during the financial crisis. The analysis focuses on both internal and external variables regarding the profitability of banking sector, including bank-specific variables, industry-specific variables and macro economy variables. Data over the period 2007-2012 for 8677 US banks is derived from the Federal Deposit Insurance Corporation, Nasdaq Stock Market and Federal Reserve Bank. Fixed effect panel model are used to analyze the estimator and the significance of the determinants of the profitability. In this study, I test the nonlinear relationship between profitability and capital adequacy ratio and also find that economies of scale exist in the US banking industry during the financial crisis. Deposit to total asset (DEPOSIT) and investment securities at market value to total assets (SEC) also impact the profitability of the banking sector. The external variables, such as the goodwill (LNGW), Federal Reserve discount rate (RATE) and Herfindahl-Hisrschman Index (HERF), determine the profitability of banks as well. Furthermore, I compare the results from this study with the previous research by Paolo Hoffmann (2011) for U.S. banks\u27 profitability before financial crisis and find the impact of the capital adequacy ratio (CAP) and the asset size (SIZE) take an extremely large change and other variables, such as total loan to total asset (LOAN), interest expense to total asset (INTEXP), deposit to total asset (DEPOSIT), securities invested to total asset (SEC), Herfidahl-Hisrschman Index (HERF) and reputation (LNGW) change in size and significance during the financial crisis