Bank Profitability During Recessions

42 Pages Posted: 24 Oct 2011

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Leo de Haan

De Nederlandsche Bank

Marco Hoeberichts

De Nederlandsche Bank - Research Department

Maarten R.C. van Oordt

Government of Canada - Bank of Canada

Job Swank

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); De Nederlandsche Bank

Date Written: July 1, 2010

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.

Keywords: Bank profitability, Business cycle

JEL Classification: E32, G21

Suggested Citation

Bolt, Wilko and de Haan, Leo and Hoeberichts, Marco M. and van Oordt, Maarten R.C. and Swank, Job, Bank Profitability During Recessions (July 1, 2010). De Nederlandsche Bank Working Paper No. 251. Available at SSRN: https://ssrn.com/abstract=1948483 or http://dx.doi.org/10.2139/ssrn.1948483

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Leo de Haan

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Marco M. Hoeberichts

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31-20-524 2890 (Phone)
+31-20-524 2529 (Fax)

Maarten R.C. Van Oordt

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Job Swank

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P O Box 1738
3062 PA Rotterdam
Netherlands

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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