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Determinants of bank performance: evidence from replicating portfolios

Carlo Altavilla, Juliane Begenau, Lorenzo Burlon and Franziska Maruhn

No 2937, Working Paper Series from European Central Bank

Abstract: We construct a novel measure of bank performance, investigate its determinants, and show that it affects bank resilience, lending behaviour and real outcomes. Using confidential and granular data, we measure performance against a market-based benchmark portfolio that mimics individual banks’ interest rate and credit risk exposure. From 2015 to mid-2022, euro area banks underperformed market benchmarks by around e160 billion per year, amid substantial heterogeneity. Structural factors, such as cost inefficiencies, rather than monetary or regulatory measures, were the main driver of bank underperformance. We also show that higher edge banks are less reliant on government support measures and less likely to experience the materialisation of interest rate or credit risk when hit by shocks. Using the euro area credit register and the pandemic shock for identification, we find that higher edge banks originate more credit, direct it towards more productive firms, and support more firm investment. JEL Classification: E52, G12, G21, G28

Keywords: banking; credit supply; maturity transformation; replicating portfolio (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ifn and nep-mon
Note: 2279334
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242937

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