Bank Profitability in Europe: Not Here to Stay
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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.
Series:
Working Paper No. 2024/142
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
Frequency:
regular
English
Publication Date:
July 9, 2024
ISBN/ISSN:
9798400281204/1018-5941
Stock No:
WPIEA2024142
Format:
Paper
Pages:
45
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