PROFITABILITY IN THE GREEK BANKING SYSTEM: A DUAL INVESTIGATION OF NET INTEREST AND NON-INTEREST INCOME
Dimitrios P. Louzis
Bank of Greece and Athens University of Economics and Business
Angelos T. Vouldis
Bank of Greece and European Central Bank
Abstract
This study examines in parallel the determinants of interest and non-interest income in the Greek banking system aiming to understand the primary drivers of overall profitability for Greek banks. Using dynamic panel data techniques and a unique data set, including supervisory data, covering the whole Greek commercial banking system from 2004 to 2011, we find that net interest income is primarily affected by the banks’ market power, their operating costs and their strategic choice to diversify their income sources by enhancing non-interest income. On the other hand, non-interest income is more persistent than net interest income, with the more efficient banks, possessing a strong deposit base, having greater leverage in boosting their non-interest income. Aggregate demand conditions and inflation can also affect both income components. Moreover, interest- and non-interest income are found to be substitutes rather than complements, with non-interest income used as an indirect competition instrument by efficient banks, instead of competing directly with their peers through prices in loans and deposits.
Keywords: Profitability; Non interest income; Dynamic Panel data; Greek banking system.
JEL Classifications:
Acknowledgement: The authors would like to thank Heather Gibson for her constructive comments and suggestions. The views expressed in this article do not necessarily represent those of the Bank of Greece.
Correspondence:
Bank of Greece,
Financial Stability Department,
3 Amerikis Str., 10564,
Athens, Greece.
Phone: +30 210 3205169
Fax: +30 210 3205419
Email: dlouzis@aueb.gr ; dlouzis@bankofgreece.gr