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Bank Profitability During RecessionsWilko BoltDe Nederlandsche Bank (Dutch Central Bank) Leo De HaanDe Nederlandsche Bank Marco HoeberichtsDe Nederlandsche Bank - Research Department Maarten R.C. Van OordtDe Nederlandsche Bank Job SwankErasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); De Nederlandsche Bank July 1, 2010 De Nederlandsche Bank Working Paper No. 251 Abstract: This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank’s lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets.
Number of Pages in PDF File: 42 Keywords: Bank profitability, Business cycle JEL Classification: E32, G21 working papers seriesDate posted: October 24, 2011Suggested CitationContact Information
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