Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle
IMF Working Papers, May 9, 2018
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Bibliographic details
- Authors: Enrica Detragiache, Thierry Tressel, Rima A Turk
- Published: May 9, 2018
- Series: IMF Working Papers
Summary
- Authors: Enrica Detragiache, Thierry Tressel, Rima A Turk
- Publication date: May 9, 2018
- Series: Working Paper No. 2018/099
- Pages: 34
- Volume: 2018
- Issue: 099
- Stock No: WPIEA2018099
- ISBN: 9781484354544
- ISSN: 1018-5941
- The paper investigates EU banks’ profitability through the recent financial cycle using bank-level balance sheet and income statement data.
- Net interest margins remained broadly stable over the financial cycle, including post-crisis.
- There is no clear evidence that aspects of bank business model, such as higher reliance on fees and commission income, were associated with better profitability post-crisis.
Key empirical findings
- Banks that were more successful at protecting their profits exhibited:
- A less pronounced deterioration in loan quality.
- A larger improvement in cost efficiency.
- More aggressive downsizing of assets during the crisis.
- A more marked reduction in reliance on wholesale funding post-crisis.
- No clear link found between higher reliance on fees and commission income and improved post-crisis profitability.
- Net interest margins remained broadly stable over the financial cycle, including post-crisis.
Subject areas and keywords
- Subject: Bank soundness; Banking; Financial cycles; Financial institutions; Financial sector policy and analysis; Global systemically important banks; National accounts; Nonperforming loans; Personal income
- Keywords: bank; bank asset; bank characteristic; bank leverage; bank performance; Bank Profitability; Bank soundness; EU bank; Financial Crisis; Financial Cycle; Financial cycles; Global; Global systemically important banks; Nonperforming loans; Personal income; profit growth; profitability; return on equity; WP
Research and policy implications
- Profit protection during crisis episodes is associated with better post-crisis outcomes through multiple channels: loan quality preservation, cost efficiency gains, asset downsizing, and reduced wholesale funding dependence.
- Stability of net interest margins suggests that interest income dynamics alone do not explain cross-bank differences in post-crisis profitability.
- Business-model shifts toward fee and commission income do not, by themselves, appear to guarantee improved profitability after the crisis.
Source: Enrica Detragiache, Thierry Tressel, and Rima A Turk, "Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle", IMF Working Paper No. 2018/099, May 9, 2018.
Content in this bundle
- 1. Profitability