Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability
IMF Working Papers, November 22, 2019
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- Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability
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Bibliographic details
- Authors: Selim A Elekdag, Sheheryar Malik, Srobona Mitra
- Published: November 22, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513516141.001
Summary and research approach
- Paper explores determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions.
- Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability.
- Estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery.
- For some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability.
Key findings
- Real GDP growth is a primary and reliable determinant of bank profitability.
- NPL ratio is a primary and reliable determinant of bank profitability.
- Higher economic growth raises profits on average, but:
- A large swath of banks would most likely continue to struggle even amid a strong economic recovery.
- Durable profitability improvements for struggling banks likely require:
- Determined reduction in NPLs.
- Cost efficiency improvements.
- Customized changes to business models.
Policy recommendations and strategic implications
- Prioritize NPL reduction strategies for banks with elevated NPL ratios.
- Implement cost efficiency measures to improve bank profitability.
- Customize business model adjustments at the bank level rather than one-size-fits-all solutions to durably raise profitability.
Content in this bundle
- Working Paper