Bank Profitability in Europe: Not Here to Stay

Bank Profitability in Europe: Not Here to Stay
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Volume/Issue: Volume 2024 Issue 142
Publication date: July 2024
ISBN: 9798400281204
$20.00
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Topics covered in this book

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Banks and Banking , Finance , Economics- Macroeconomics , European banks , bank profits , interest rate margins , asset quality , bank capital , bank taxation , , bank profit , interest rate margin , bank taxation , impairment cost , Bank soundness , Financial statements , Income , Yield curve , Central bank policy rate , Europe , Global

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.