Do profitable banks make a positive contribution to the economy?

• Published in: Journal of risk and financial management Vol. 13; no. 8; pp. 1 - 18
• Main Authors: Kumar, Vijay, Bird, Ron
• Format: Journal Article
• Language: English
• Published: Basel MDPI 01.08.2020; MDPI AG
• Subjects: Bank failures; bank profitability; Banking industry; Branch banking; Economic activity; Economic development; Economic growth; Emerging markets; Financial inclusion; financial sector development; Financial services; GDP; global financial crisis; Gross Domestic Product; Investigations; Investments; Rates of return; Studies; Bangladesh; Singapore; United States > US; Asia-Pacific region; China; Japan; Hong Kong China; Malaysia; Australia; India; Indonesia
• ISSN: 1911-8074; 1911-8066; 1911-8074
• DOI: 10.3390/jrfm13080159

A number of studies have investigated the relationship between financial sector development and economic growth; however, the impact of bank profitability on economic growth is still unclear. We investigate the link between bank profitability and economic growth in the Asia-Pacific region over the period 2004-2014. Using the system GMM estimator, our findings suggest that a profitable banking sector is a prerequisite for economic growth in the Asia-Pacific region and that the impact of bank profitability on economic growth is more prominent in small banking sectors. Perhaps surprisingly, we found that the bank size has a negative impact on GDP growth, with the influence of bank profitability on economic growth reducing as the size of the banking sector increases. Our results also show that the impact of profitability on economic growth is much larger in developed economies compared to small emerging and large emerging economies.