This paper tests empirically several assumptions and predictions of the Melitz (2003) and Baldwin and Forslid (2004) heterogeneousfirm framework. The focus is on liberalisation-induced productivity and profitability consequences for international and regional banks in seven European countries during the 1988 to 2003 period. Confirming higher productivity and profitability for international banks throughout the investigated period, the panel data analysis also establishes a positive link between higher international market participation and bank productivity. It also provides evidence for an increase in aggregate banking productivity that can be attributed to banking liberalisation. On the other hand, our results do neither detect a narrowing of the productivity gap nor a widening of the profitability gap between international and regional banks. This can be accounted for by the particular regulatory environment of the banking sector as well as the deregulatory nature of banking liberalisation only affecting fixed trade costs but not variable trade costs.