China & World Economy / 90–108, Vol. 25, No. 1, 2017

Comparison of Bank Profitability in China and the USA

Ning Ding, Hung-Gay Fung, Jingyi Jia*

Abstract

This paper examines and compares the profitability of banks in the USA and China. The USA has the largest market-based banking system and the financial system of China is still bank-based. Our analysis indicates that in terms of profitability, banks in China outperformed those in the USA during our study period (2008–2014). Real estate loans had an adverse effect on US bank profitability during the financial crisis and no effect after the crisis but consistently improved the profitability of Chinese banks. Interest margins have no effect on US bank profitability but a consistently positive effect on Chinese banks, confirming that China is a traditional bank-based economy. Interbank loans have a positive and significant effect on Chinese bank profitability, while interbank domestic loans have a negative effect on US bank profitability. Finally, size had a positive effect on US banks after the financial crisis period, confirming the scale economies of large US banks, but a negative effect on Chinese banks, indicating diseconomies of scale.

Key words: bank profitability, efficiency, real estate loans, shadow banking
JEL codes: E44, G28,