Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle

Abstract

The paper investigates EU banks' profitability through the recent financial cycle using banklevelbalance sheet and income statement data. We find that banks that were more successfulat protecting their profits had a less pronounced deterioration in loan quality and a largerimprovement in cost efficiency. They also downsized their assets more aggressively duringthe crisis, and reduced reliance on wholesale funding more markedly post-crisis. Net interestmargins remained broadly stable over the financial cycle, including post-crisis, and there isno clear evidence that aspects of bank business model, such as higher reliance on fees andcommission income, were associated with better profitability post-crisis.

Keywords: Financial crises, Banking sector, Banks, Profits, Financial cycles, European Union, Financial Cycle, Bank Profitability, Financial Crisis, General

JEL Classification: E30, G01, G21