Profitability and Competition in Banking Markets

An Aggregative Cross Country Approach

Abstract

The relationship between profitability and competition in banking markets has been the focus of discussion for some time. Using the OECD Bank Profitability data base, the paper attempts to advance our understanding of the following issues on which no unanimity exists in the literarture. First, in order to assess banking market structures we employ the Lerner monopoly index as a proxy for market power. Second, our international database allows us to provide some insights into the nature of competition on a global basis. Our research points to its market power reducing effects. Third, as for risk we suggest a measure that is more in tune with the concept used in the Value-at-Risk-approaches than the contributions in the literature. The volatility of gross bank-income appears to capture the uncertainties of banking; it exerts a consistently positive influence on bank profitability and margins.