A Statistical Estimation of Commercial Bank Profitability

This study constructs aggregative profitability estimating equations for commercial banks. These equations were designed to serve three purposes: (1) to give bank management and other interested parties -- such as bank stockholders, bank customers, and investors -- insight into the operating relationships that best estimate and explain bank profitability; (2) to develop "personalized" equations that consider the fact that banks must, in the short run, operate in a particular Federal Reserve district with total deposits of a given general size; and (3) to assist legislators and bank regulatory officials to understand better the effects of banking statutes, regulations, and policies on bank profitability. The objective, then, is to develop a set of equations that are rationally and statistically meaningful, as data permit, for estimating and explaining the operating relationships that best explain bank profitability.The usefulness to bank management of equations that estimate profitability is quite evident. To the extent that generalized equations give reasonable single bank approximations they should be used in the profit planning function. However, frequent revision of the equations may be necessary because, as is known, bank managers function in dynamic environments. To the extent the necessary data are available, these equations can also prove useful to those who, for often different reasons, are interested in understanding the operating relationships that best explain bank profitability