The Relative Importance of Internal Factors for Bank Performance in Developed and Emerging Economies

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