Research Proposal
Research question
The research question in the study to be conducted will be how financial regulation and ownership issues as determinants of profitability impact the European banking sector.
Justification of the research question
Previously, numerous studies have been conducted to investigate the determinants of profitability in the European banking sector. In particular, Bucevska, and Hadzi Misheva (2017, p. 146) conducted an empirical study to investigate the determinants of profitability in the banking industry with a focus on selected Balkan countries (Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Montenegro, and Macedonia). In the previous study, Bucevska et al (2017) emphasised on the market structure and efficiency on how the banks performed from 2005 to 2009. The present study will be a follow-up in that the main variables to be examined will be financial regulations and issues of ownership.
Background to the question
In the past 2 decades, the banking systems of European markets have experienced major changes. The financial crisis and the European integration had a huge impact on the performance and structure of banks (Petria, Capraru, and Ihnatov, 2015, p. 518). In 1957, the first stage of European integration was made after adoption of the Treaty of Rome which established within the European Union a single banking market. Later on, other regulations and laws were set to achieve consolidation in the single-market program. The biggest test of the European banking system was during the 2007/2008 financial crisis when the performance of banks was affected highly (Petria, et al., 2015, p. 518). Years later, the European Union is set to review the current regulations considering the decision by Britain to withdraw from the EU in what is being referred to as Brexit. Thus, conducting the present study today is interesting largely because the operations of banks will be affected if it has not already happened once the process has been complete.
The banking sector through commercial banks plays a critical role in economic resource allocation of nations (Ongore 2013, p. 237). Commercial banks contribute to a nation’s economic growth by ensuring that funds are available for the investors who seek to borrow in addition to financial deepening (Otuori 2013, p. 86). The financial system of the European Union has over the years been characterised by the dominant role the banks play (Athanasoglou et al., 2006, p. 1). Consequently, if there is efficiency in the banking system, there should be records of profitability advances, better customer services, and an increasing amount of money that rolls from savers to borrowers (De Bandt and Davis, 2000, p. 1045). The basic measure of the profitability of banks is the ROA (Return on Assets). While ROA provides useful information on the profits made, the owners are more interested on what is earned from the equity investment. The return on equity (ROE) is used in making this particular measurement (Mishkin Frederic et al., 2009, p. 321).
The study to be conducted will therefore examine the determinants of profitability in the European-banking sector with specifics on financial regulation and ownership issues.
Scope and limitations of the study
The scope of the study will be commercial banks in Europe and not other regions or countries. Moreover, the banks to be involved will have to be European owned. The data of these banks has to be available publicly. One of the limitations of the research will be narrowing down the profitability determinants to only two, financial regulations, and ownership issues. Another limiting factor will be the timelines to be evaluated specifically the most recently available data for the five last years for each commercial bank. Finally, the selected methodology will limit the outcomes and scope of the research.
Key Literature papers
Previously, there have been studies which investigated the influence an organisation’s characteristic can have on profitability (Menicucci, and Paolucci 2016, p. 411). Of recent, there have been researches done that seek to examine the main determinants of profitability of banks in different nations across the world. For instance, some of the studies conducted have been specific to certain countries (Ghazouani and Moussa 2013; Saeed 2014, p. 42; Tarus, Chekol, and Mutwol 2012, p. 199) while others have examined a panel of countries in a certain region (Pasiouras and Kosmidou, 2007, p. 222; Staikouras and Wood, 2004, p. 57).
Recently, Stančić, Čupić, and Obradović, (2014, p. 573) conducted a study that investigated the impact of ownership structure and the board on profitability of commercial banks from the South East Europe for the period 2005-2009. The researchers made an analysis through the use of Ordinary Least Squares regression analysis on a data set from an unbalanced panel. The results of the study depicted that there an adverse and critical relationship between the bank profitability and the bank size. Additionally, while ownership concentration impacted the bank profitability, the outcome shows it was weak. Stančić et al. (2014) also conclude that domestic banks that were privately held outperformed foreign and state-owned banks.
Barth, Nolle and Rice (1997, p.1) conducted one of the first studies to examine the relationship between regulation and profitability. Nonetheless, the focus was not purely between these variables. Barth et al. (1997) investigated the structure, regulation, and performance of the banking sector in G-10 and EU countries using 1993 data. The study used a cross-section analysis where the outcome depicted a great variance in these variables. The results from this study should be cautiously generalised considering it was based on exploratory analysis. In 2004, Barth et al. (2004, p. 205) conducted a follow-up study where the collected a new dataset from 107 countries. Among the purposes of banking regulation is assuring a banking sector that is solvent and putting restrictions for banks to avoid excess risk taking. Nevertheless, Rime (2001, p. 789) depicted that there lacks vital effect of regulatory pressure of the risks taken by Swiss banks from the year 1989 to 1995. Additionally, the study revealed that the Tier capital increased when there was enforcement of strict regulations. Heid et al. (2004) would report similar results in a study conducted in Germany between 1993 and 2004. The scope of the study can be broadened through the incorporation of issues to do with ownership structure. Laeven and Levine (2009, p. 259) conducted a study to assess how regulation and ownership structure affects the risks banks take. The results revealed that when owners have more powers to vote, the risks taken increases.
Previous studies seeking to assess the relationship between the profitability of banks and the ownership structure issues have provided mixed results. For Instance, Iannotta, Nocera, and Sironi, (2007) study depicted that banks mutually owned in addition to those owned by the government are less profitable when compared to private banks. However, studies by Dietrich and Wanzenried (2011) and Athanasoglou et al., (2008) fail to find a considerable relationship between profitability and ownership.
Research methodologies
The modelling in the study to be conducted will be based on panel data techniques. The longitudinal or panel data has both time series and cross-sectional elements. The time series is reflect in the studies period (2012-2017) while the cross-sectional element is shown by the use of dissimilar banks in the European Union. Panel data has been preferred because of the heterogeneity characteristic (Baltagi, 2005). The econometric model to be adopted will be as suggested by Athanasoglou et al. (2008) and Dietrich and Wanzenried (2011) in the equation below.

Data sources
The data for the variables will be obtained from Bankscope, a database that has comprehensive financial statements information, ownership, and ratings of approximately 30,000 global banks. The data will be derived from income statements, balance sheet, and the annual reports notes. Other sources of data to be used will be the World Bank database, and the European Bank for Reconstruction and Development (EBRD).
Research Expectations, ethical considerations and their implications
The expectations of the study include establishing there is a relationship between ownership and bank profitability as well as financial regulations having a significant effect on profitability. The ethical considerations will include acknowledging the data sources to avoid plagiarism through citation and referencing. The research will have implications for the European Union governing body considering the restructuring which is happening because of Brexit. New regulations should take into account the need for banks to make profits.

References
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Athanasoglou, P., M. Delis and C. Staikouras., 2006. Determinants in the bank profitability in the South Eastern European Region. Journal of Financial Decision Making, 2: 1-17
Baltagi, B. 2005. Econometric Analysis of Panel Data (3th ed.). West Sussex: John Wiley & Sons Ltd.
Barth, J. R., Caprio Jr., G., & Levine, R. 2004. Bank regulation and supervision: what works best? Journal of Financial Intermediation, 13(2), 205-248.
Barth, J. R., Nolle, D. E., & Rice, T. N. 1997. Commercial Banking Structure, Regulation and Performance: An International Comparison. Managerial Finance, 23(11), 1-39.
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