Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks

We investigate how banking market competition, informational opacity, and s ensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistence at the high and low ends of the performance distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants o f persistence; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that persistence remains sensitive t o regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry. (C) 2000 Published by Elsevier Science B.V. All rights reserved.