Determinants of Bank Profitability in Emerging Markets

36 Pages Posted: 24 Jan 2018

See all articles by Emanuel Kohlscheen

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Andrés Murcia Pabón

Bank for International Settlements (BIS)

Julieta Contreras

Bank for International Settlements (BIS)

Date Written: January 1, 2018

Abstract

We analyse key determinants of bank profitability based on the evolution of balance sheets of 534 banks from 19 emerging market economies. We find that higher long-term interest rates tend to boost profitability, while higher short-term rates reduce profits by raising funding costs. We also find that in normal times credit growth tends to be more important for bank profitability than GDP growth. The financial cycle thus appears to predict bank profitability better than the business cycle. We also show that increases in sovereign risk premia reduce bank profits in a significant way, underscoring the role of credible fiscal frameworks in supporting the overall financial stability.

Keywords: bank profitability, credit, risk premia, emerging markets, interest rates

JEL Classification: E32, E43, G21

Suggested Citation

Kohlscheen, Emanuel and Murcia Pabón, Andrés and Contreras, Julieta, Determinants of Bank Profitability in Emerging Markets (January 1, 2018). BIS Working Paper No. 686, Available at SSRN: https://ssrn.com/abstract=3098196

Emanuel Kohlscheen (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Andrés Murcia Pabón

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Julieta Contreras

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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