'banks' earnings': Empirical Evidence of the Influence of Economic and Financial Market Factors

Posted: 9 Jun 2020

See all articles by Hervé Alexandre

Hervé Alexandre

Université Paris-Dauphine, PSL Research University; Université Paris Dauphine

Date Written: September 3, 2017


The structure of income is a foremost address within research on banks’ perfor- mance, especially with regard to effects on the resilience of banks’ earnings. Indeed, given their central position in the economy, banks shall thrive to generate sustainable earnings and control for their potential volatility. Existing studies mostly consider the weight of non-net interest income (nonNII) as opposed to the traditional NII income source. Such aggregated nonNII is found to increase earn- ings risk but more granular studies conflict. We propose an original investigation of the influence of economic and financial conditions on various income types, assuming that performance may actually be driven by both the income structure and external conditions. We focus European banks, which have long been allowed to diversify beyond retail banking. Out of a straight panel framework, we question if the influence of external conditions spreads to earnings components other than credit losses and trading income and if it does allow for diversification benefits among compo- nents. We find that each component actually evolves owing to its own equation. Furthermore, effects of single variables may cumulate over different components of earnings (e.g. GDP) or provide with diversification benefits. These effects are all the more important since they are not mitigated by operating expenses. Hence, over a regarded period, banks’ performance depends upon their structure of income and upon volatilities and correlations of influential variables. Besides con- trolling for ex-ante volatility, our approach shows that a given structure of income is not necessarily more resilient than others but that selected non-banking income may support a higher stability of Earnings.

Keywords: Bank Performance, Diversification, Earnings Resilience, Interest Rate Mismatch, Risk Factors

JEL Classification: G21, G28, L25

Suggested Citation

Alexandre, Hervé, 'banks' earnings': Empirical Evidence of the Influence of Economic and Financial Market Factors (September 3, 2017). Review of Financial Economics, Vol. 36, No. 2, 2018, Université Paris-Dauphine Research Paper No. 3601583, Available at SSRN: https://ssrn.com/abstract=3601583

Hervé Alexandre (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016

Université Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775

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