The Relative Importance of Industry- & Country-Specific Factors for Bank Performance in Developed and Emerging Economies

This study examines relative importance of industry- and country-specific factors for profitability of banks operating in emerging and developed economies. A period spanning between two major crises is examined: since 2002, the end of high-tech bubble burst lasting 1999-2001, until mortgage-driven one in 2008. The empirical support is provided for the idea that industry- and country specific factors are much more important for bank performance in emerging rather than in developed economies due to higher level of uncertainty and as results due to higher magnitude of the reaction of banks to external shocks. The issue of higher level of sensitivity of bank performance to external settings in emerging economies is closely associated with a high level of diverging expectations of market participants with respect to the overall economic situation and the higher agency problems in these economies. Further, this effect is more pronounced for performance of leading banks across-the-board, which is due to their higher ability to deal better with challenges coming from the external environment compared to lagging banks. In addition to that, the findings of this research support the study’s hypothesis that suggests that the importance of the exchange rate regime for bank profitability increases when approaching a semi-flexible regime.