Key Determinants of German Banking Sector Performance

What drives banking performance is a little-explored research topic, despite the copious literature. This paper reports findings that offer new insights into what drives net interest margin, a key performance indicator (KPI) for the German banking sector. We consider the link between performance and a few carefully chosen critical bank-specific factors using the most up-to-date econometric methods such as panel regressions using a Generalized Method of Moments with data from 11 recent years. The results show that credit risk, income diversification and size have significant negative effects on net interest margin, as predicted by theory. Meanwhile, capital adequacy has a positive effect, as does the liquidity risk. The paper also finds that the effects of concentration and macroeconomic variables on net interest margin are weak and statistically insignificant. In this study, it was found that credit risk, income diversification, size, capital adequacy and liquidity risk are significant factors contributing to a new understanding of German banking performance.