What drives bank earnings? Evidence for 28 banking sectors

Laurence Pouw and Jan Kakes

Applied Economics Letters, 2013, vol. 20, issue 11, 1062-1066

Abstract: The crisis has revived interest in the determinants of bank earnings. We investigate the relationship between profitability and balance sheet composition of 28 national banking sectors. Using Statistical Cost Accounting, we find a plausible pattern of individual assets’ and liabilities’ contributions to earnings and costs. Both wholesale and retail activities yield positive margins, while interbank lending and customer deposits are the most expensive funding sources. Wholesale finance has a positive effect on profitability, which may explain banks’ increasing reliance on it prior to the crisis. Economic growth and unemployment have a procyclical impact, while inflation tends to erode profitability.

Date: 2013
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DOI: 10.1080/13504851.2013.783676

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