PROFITABILITY BEFORE THE CRISIS AND DURING THE CRISIS.

DETERMINANTS OF PROFITABILITY BEFORE THE CRISIS AND DURING THE CRISIS
Dietrich and Wanzenried (2011) examine a variety of determinants and banks’ profitability using data over the last decade. Moreover, they consider the impact of the financial crisis on the determinants of bank performance. Dietrich and Wanzenried (2011) analyze the profitability of 372 commercial banks in Switzerland both in the pre-crisis period, 1999-2006 and in the period of the crisis, 2007-2009. They perform separate regressions for both periods (pre-crisis and crisis) as for the total period. They also run two regressions in which the first regression includes only bank-specific factors while the latter regression includes both bank-specific and macroeconomic factors.
 
Among others, their paper examines an expanding number of factors, including bank-specific, industry-specific and macroeconomic factors. To test which determinants of banks’ profitability exist they apply a linear dynamic model with dependent variables return on average assets (ROAA), return on average equity (ROAE) and net interest margin (NIM) as proxy for profitability and they incorporate a lagged dependent variable within the explanatory variables to account for profit persistence. Besides the explanatory variables that earlier research used, such as equity-to-asset ratio, cost-to-income ratio, size and ownership structure, Dietrich and Wanzenried (2011) expand bank-specific factors by incorporating loans loss provisions over total loans (credit quality), funding costs and interest income share. Furthermore, they expand external variables such as effective tax rate, real GDP growth and the term structure of interest rates.
Results suggest that coefficients and significances differ between the two samples, pre-crisis and crisis. Some interesting and remarkably results are worth to mention:

First, the empirical results indicate that there is a high degree of profitability persistence within the banking sector, which justifies the use of a lagged dependent variable.
Second, the coefficient of equity-to-asset ratio is insignificant before the financial crisis but turns out to be significant and negative in the crisis period. These results stand in sharp contrast to the findings of Berger (1995) and Goddard et al. (2004) who found a positive relationship. Dietrich and Wanzenried (2011) propose as explanation that safer Swiss banks obtained additional saving deposits that could not be converted into loans since demand decreased during the crisis. For the total sample the estimated of the equity-to-asset ratio is also negative and significant.
Third, the loan loss provisions to total loans as proxy for credit risk, is insignificant before the crisis and turns out to be significant and negative during the crisis. The authors suggest that Swiss banks reported very low loan loss provisions before the crisis, while these provisions increased substantially during the crisis. This effect is not surprisingly, banks with low credit quality are more affected when markets collapse, a larger amount of loans is not repaid then. In the total sample the variable is insignificant.
Fourth, funding costs have a significant negative impact on profitability, banks that raised cheaper funds are more profitable. During the crisis, this relationship does not hold anymore, Dietrich and Wanzenried (2011) suggest that during the crisis funding costs for all banks has dropped to low levels.
Fifth as one would expect the cost-to-income ratio is significant and negative both in the total sample as in the two separate subsamples. The finding is rather straightforward since higher cost results in lower profit.
Sixth, Dietrich and Wanzenried (2011) find no relationship between ownership structure and profitability before the crisis, supporting research of Bourke (1989), Altunbas et al. (2001) Athanasoglou et al. (2008). However, during the financial crisis the coefficient is significant and positive, implying that state-owned banks are more profitable than private banks during the financial crisis, supporting research of Molyneux and Thornton (1992). The result stand in contrast to research of Iannotta et al. (2007), in which a negative relationship between governmental, mutual owned banks and profitability is found. The authors suggested that state-owned banks are considered as safer during the crisis, which could lead to lower funding costs or additional customers.

 
Most of the bank-specific results presented here confirm relationships found in earlier studies such as Molyneux and Thornton (1992) and Athanasoglou et al. (2008). As the results of Dietrich and Wanzenried (2011) are only applicable to the Swiss banking sector, this thesis extent the research tot the European banking sector. Furthermore, current research will extend the mentioned studies by focusing on funding and liquidity variables as those factors become increasingly important in the banking sector.
 

Get Professional Assignment Help Cheaply

.
Whichever your reason may is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Our essay writers are graduates with diplomas, bachelor’s, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college diploma. When assigning your order, we match the paper subject with the area of specialization of the writer.
Why Choose Our Academic Writing Service?

Plagiarism free papers
Timely delivery
Any deadline
Skilled, Experienced Native English Writers
Subject-relevant academic writer
Adherence to paper instructions
Ability to tackle bulk assignments
Reasonable prices
24/7 Customer Support
Get superb grades consistently

How It Works
1.      Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2.      Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3.      Track the progress
. Receive a paper.
4.      Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
 
PLACE THIS ORDER OR A SIMILAR ORDER WITH 24/7 ESSAY WRITERS TODAY AND GET AN AMAZING DISCOUNT