Bank Profitability in Europe: Not Here to Stay

By Ruo Chen, Vincenzo Guzzo, Fazurin Jamaludin, Adil Mohommad, Ritong Qu, Yueshu Zhao

July 9, 2024

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Format: Chicago

Ruo Chen, Vincenzo Guzzo, Fazurin Jamaludin, Adil Mohommad, Ritong Qu, and Yueshu Zhao. Bank Profitability in Europe: Not Here to Stay, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Slower passthrough of policy interest rate hikes to deposit rates relative to their loan rates has led to sharply wider bank net interest margins. Combined with resilient asset quality, wider net interest margins supported record profits for European banks in 2023. Drawing on historical data from the balance sheets and income statements of over 2,500 European banks, this paper shows that abnormally high profits are expected to fade soon as interest income will decline, once policy rates start being lowered, while higher impairment costs historically have weighed on profits with a lag. Moreover, a number of structural factors that have eroded the performance of European banks in the past two decades have largely remained unaddressed and will continue being a drag on profits and capital. Therefore, policymakers should encourage banks to preserve capital buffers and build resilience to future shocks, while exercising caution when considering taxes on profits or other measures that could divert potential sources of capital from banks.

Subject: Bank soundness, Central bank policy rate, Financial sector policy and analysis, Financial services, Financial statements, Income, National accounts, Public financial management (PFM), Yield curve

Keywords: Asset quality, Bank capital, Bank profit, Bank profits, Bank soundness, Bank taxation, Bank taxation., Central bank policy rate, Europe, European banks, Financial statements, Global, Impairment cost, Income, Interest rate margin, Interest rate margins, Yield curve

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/142
Stock No:

WPIEA2024142
ISBN:

9798400281204
ISSN:

1018-5941

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