What happened to profitability? Shocks, challenges and perspectives for euro area banks

Gong Cheng and Dirk Mevis

The European Journal of Finance, 2019, vol. 25, issue 1, 54-78

Abstract: This paper analyses the evolution of bank profitability from 2005 to 2016, with a focus on the period covering both the global financial crisis and the euro area crisis. To accomplish this, we constructed a dataset that includes financial statement information from 310 euro area banks. Using a dual approach – a ‘bottom-up’ approach as applied by bank analysts and macroeconomists' ‘top-down’ approach, we find that the profitability of euro area banks was hit by two shocks of different nature. The Lehman Brothers collapse affected mostly big banks with diversified portfolios via losses in their securities investment. The subsequent euro area debt crisis and economic recession hit more traditional banks specialising in retail lending activities, mainly through increasing impairment costs. If the first shock had a one-off impact on bank profitability, the second shock is far more long-lasting and is still depressing the profitability of banks in peripheral Europe.

Date: 2019
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Related works:
Working Paper: What Happened to Profitability? Shocks, Challenges and Perspectives for Euro Area Banks (2021)
Working Paper: What happened to profitability? Shocks, challenges and perspectives for euro area banks (2015)
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DOI: 10.1080/1351847X.2018.1470994

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