Bank profitability compared

I’m trying to find quantitative indicators of bank profitability and activity that might be compiled into an index of macro-prudential stability at sub-national, regional scales. Ideally, such an index or set of indicators would be able to identify thresholds around which sector profitability is endangered or to identify mid-term growth potential for the area at large.

At the national-level, data for aggregate bank profitability is available. The World Bank collects data ostensibly from national agencies on the return on bank assets. The graph below was created using the FRED ( function of the St. Louis Federal Reserve. It compares the return on bank assets for Australia, Canada, the United Kingdom, and the United States.


The dataset appears to go back only to 1998 and is annual, which is a shame as quarterly fluctuations can be informative. It is interesting that Canada has demonstrated a relatively consistent upward trend since 2000, while the United States had a steady level of profitability from 2000 to 2006. Australia and the United Kingdom are characterized by rather large swings.

The Federal Financial Institutions Examination Council (FFIEC) is responsible for collating similar data for US banks, which is no small task as there are several thousands of banks in the US. That data is collected quarterly, and extends back to the early 1980s. The graph representing US bank profitability (also return on assets) is available below.


This graph indicates that American banks enjoyed a long period of stable profits. The S&L crisis is clearly evident in the late 1980s, although it seems that despite a brief recovery, for several years after the immediate crisis years, profits remained depressed. It was not until around 1991/2 that profitability shifted to a higher plateau. Also notable is that profitability increased before the economic boom from the information technology revolution, which did not really begin in earnest until 1994/5. An additional important feature is that, although profitability had returned to positive levels after the 2008 crisis, it remains below its average levels during the preceding twenty-year period.

While profitability is a good indicator of stability, it has its limits. From my perspective, I wonder how possible it would be to disaggregate profitability between regions and types of banks (for instance, depending on their loan portfolio concentrations [commercial, industrial, residential, etc]). That is, it would be very enlightening to know how banks in different parts of the country are contributing to or perhaps retarding economic growth in general through their impact on the cost and type of loans, raising deposits, and their management of non-performing loans. In particular, it would be interesting to examine the extent to which bank activity in a given area relies on deposit-taking or recourse to capital markets.

In the meantime, I’m digging around for comprehensive datasets that may have this information. Otherwise, it would be seem to be the case that one would have to aggregate this data from bank call reports, which given the number of banks and the time scale necessary for meaningful analysis, is a truly onerous task.


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