Research in International Business and Finance 21 (2007) 222–237

Factors influencing the profitability of domestic and foreign commercial banks in the European Union
Fotios Pasiouras a,b,∗ , Kyriaki Kosmidou a,c b Financial Engineering Laboratory, Department of Production Engineering & Management, Technical University of Crete, University Campus, 73100 Chania, Greece Department of Economics, Finance & Accounting, Faculty of Business, Environment & Society, Coventry University, Priory Street, CV1 5FB Coventry, UK c Department of Economics, University of Crete, 74100 Rethymno, Greece Received 5 October 2005; received in revised form 11 January 2006; accepted 12 March 2006 Available online 15 June 2006

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Abstract Using bank level data this paper examines how bank’s specific characteristics and the overall banking environment affect the profitability of commercial domestic and foreign banks operating in the 15 EU countries over the period 1995–2001. The results indicate that profitability of both domestic and foreign banks is affected not only by bank’s specific characteristics but also by financial market structure and macroeconomic conditions. All the variables, with the exception of concentration in the case of domestic banks profits, are significant although their impact and relation with profits is not always the same for domestic and foreign banks. © 2006 Elsevier B.V. All rights reserved.
JEL classification: G21; C23 Keywords: Banks; European Union; Profitability

1. Introduction Over the last years a number of factors have contributed to the growing competition in the European Union (EU) banking sector. One of the most important factors is deregulation, promoted by the Second European Directive on Banking and Financial services, concerning establishment, operation and supervision of credit institutions. This Directive sets out the principles of banking in
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Corresponding author. Tel.: +30 28210 37360. E-mail address: pasiouras@dpem.tuc.gr (F.