ABSTRACT
The profitability of banks is of interest to bank management, financial markets, bank supervisors and academics. This interest is driven by increasing consolidation in the banking sector, changes in production technology and regulation, and dissolving borders, both geographically and vis-à-vis related financial products and industries. As a result, explaining (changes in) the profitability of banks is the implicit or explicit subject of much of the banking literature. When we estimate a market power model, we look for – the abuse of – market power as a means of explaining increases and differences in profitability. And when we employ an efficient frontier model, we expect suboptimal management decisions regarding production factors to lead to differences in profitability.
