Revisiting bank profitability: A semi-parametric approach

We employ a semi-parametric empirical model and reveal evidence that the U.S. bank profitability is affected non-parametrically by the business cycle, short-term interest rates, inflation expectations, credit risk, and loan portfolio structure. If a semi-parametric perspective was not adopted then it would not be feasible to uncover the effects of these variables, as well as the effects arising from capital and financial structure upon U.S. bank profitability. In addition, the out-of-sample performance of the semi-parametric model is superior to that of the linear model. These results are of importance to policy makers in designing a macro-prudential framework for monitoring the banking system.