Global Financial Cycles, Portfolio Frictions, and Bank Profitability: Evidence from Small Open Economies

Petr Jakubik (), Matej Korinek () and Saida Teleu ()
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Petr Jakubik: Cayman Islands Monetary Authority, Cayman Islands & Charles University, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia
Matej Korinek: Charles University in Prague, Faculty of Social Sciences, Institute of Economic Studies, Prague, Czechia
Saida Teleu: Anglo-American University, Prague, Czechia

No 2026/23, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper examines how global financial conditions shape bank profitability in small, open, and externally dependent economies. Using bank-level data for Caribbean and Central American countries and System GMM estimation, we assess the impact of U.S. long-term interest rates on two profitability measures: return on equity (ROE) and return on assets (ROA). We find that U.S. Treasury yields have a strong positive effect on ROE, while the response of ROA is considerably weaker. This asymmetric transmission is consistent with portfolio and balance-sheet frictions that constrain balance-sheet adjustment and may limit asset expansion and portfolio reallocation, with global yield movements operating as an indicator of external financial conditions within the global financial cycle rather than as a purely isolated U.S.-specific monetary shock. Using a leverage-based benchmark, we show that the magnitude of the ROE response cannot be explained by accounting mechanics alone, supporting the interpretation that the ROE-ROA divergence reflects constrained adjustment rather than purely mechanical leverage amplification. The findings indicate that equity-based profitability measures are more informative indicators of external financial transmission, with implications for international financial analysis and financial stability monitoring in small open economies.

Keywords: Bank profitability, Portfolio friction; Global financial cycle; Small open economies; System GMM; Caribbean banks (search for similar items in EconPapers)
JEL-codes: E44 E58 F36 G15 G21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2026-08, Revised 2026-08
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