Is Bank Profitability that Good? Evidence on the Link between Bank Profitability and Growth

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The importance of bank profitability is regularly stressed in the public debate because of its influence on financial stability. However greater bank profits can hamper economic growth since they can be associated with lower competition reducing access to credit. The aim of this paper is to provide the first investigation of the impact of bank profitability on economic growth. We analyze this issue on a sample of 133 countries for the period 1999-2013 with OLS, fixed effects, and system GMM regressions. Our findings support the view that bank profitability fosters economic growth. Additional tests confirm the robustness of this conclusion. Thus measures that favor bank profitability are growth-enhancing.

Author(s):

Paul-Olivier Klein    
University of Strasbourg
France

Laurent Weill    
University of Strasbourg
France