Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability

39 Pages Posted: 22 Jan 2020

See all articles by Selim Elekdag

Selim Elekdag

Johns Hopkins University - Department of Economics

Sheheryar Malik

International Monetary Fund (IMF)

Srobona Mitra

International Monetary Fund (IMF)

Date Written: November 2019

Abstract

This paper explores the 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. However, the 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. Therefore, 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.

Keywords: Financial crises, Central banks, Financial services, Banking systems, Macroprudential policies and financial stability, Bank profitability, quantile regressions, conditional distributions, WP, ROA, NPL, profitability, quantile, roe

JEL Classification: C32, E30, G01, G21, E01, E63, O4, K2

Suggested Citation

Elekdag, Selim and Malik, Sheheryar and Mitra, Srobona, Breaking the Bank? A Probabilistic Assessment of Euro Area Bank Profitability (November 2019). IMF Working Paper No. 19/254, Available at SSRN: https://ssrn.com/abstract=3523127

Selim Elekdag (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7601 (Phone)

Sheheryar Malik

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Srobona Mitra

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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