 Inflation's dual impact on European banks' profitabilityRenata Karkowska, Zbigniew Korzeb and Paweł Niedziółka Journal of Policy Modeling, 2025, vol. 47, issue 1, 64-77 Abstract: Geopolitical risks have sharply heightened inflationary pressures across global economies, posing significant challenges to the banking sector. This study investigates the complex impact of inflation on banks, focusing on the dual effect of rising inflation on bank performance. On one hand, our analysis of 196 commercial banks from 31 European countries reveals that inflation drives an increase in both interest and non-interest incomes, bolstering banks' revenue streams. On the other hand, this same inflationary pressure leads to a deterioration in efficiency ratios, indicating a decline in operational efficiency. This paradox highlights a critical issue for the banking sector: while banks may experience short-term revenue gains, their overall efficiency suffers, potentially undermining long-term stability. Our findings underscore the importance of coordinated monetary and macroprudential policies to mitigate these effects and suggest that supervisory policies favoring consolidation initiatives could offer a pathway to enhanced efficiency in an inflationary environment. Keywords: European banking; inflation; performance; profitability (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:47:y:2025:i:1:p:64-77 DOI: 10.1016/j.jpolmod.2024.11.004 Access Statistics for this article Journal of Policy Modeling is currently edited by A. M. Costa More articles in Journal of Policy Modeling from Elsevier |
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