A Comparative Analysis of the Determinants of the United States and U.K. Banks’ Profitability

Abstract

This study investigates the determinants of the profitability of U.K. banks and compares them with already established and published determinants of the profitability of U.S. banks. Employing quarterly data, this paper further examines the historical and recent trends for all U.K. banks from 1996 to 2019 in the relationship between return and assets (ROA) and other bank internal (or endogenous) profitability contributors such as net interest margin (NIM), loan loss reserves, and external (or exogenous macroeconomic variables, such as the 30-year average mortgage rate, Gross Domestic Product (GDP) economic growth rate, unemployment rate, interest rate, and inflation rate by using the Generalized Method of Moments (GMM) estimator technique. The results show evidence of divergence in profit performance between U.S. and U.K. banks. Plausible explanations are put forward for these anomalous findings.