Bank Profitability in Europe: Not Here to Stay

Ruo Chen, Vincenzo Guzzo, Fazurin Jamaludin, Adil Mohommad, Ritong Qu and Yueshu Zhao

No 2024/142, IMF Working Papers from International Monetary Fund

Abstract: Slower passthrough of policy interest rate hikes to deposit rates relative to their loan rates has led to sharply wider bank net interest margins. Combined with resilient asset quality, wider net interest margins supported record profits for European banks in 2023. Drawing on historical data from the balance sheets and income statements of over 2,500 European banks, this paper shows that abnormally high profits are expected to fade soon as interest income will decline, once policy rates start being lowered, while higher impairment costs historically have weighed on profits with a lag. Moreover, a number of structural factors that have eroded the performance of European banks in the past two decades have largely remained unaddressed and will continue being a drag on profits and capital. Therefore, policymakers should encourage banks to preserve capital buffers and build resilience to future shocks, while exercising caution when considering taxes on profits or other measures that could divert potential sources of capital from banks.

Keywords: European banks; bank profits; interest rate margins; asset quality; bank capital; bank taxation.; bank profit; interest rate margin; bank taxation; impairment cost; Bank soundness; Financial statements; Income; Yield curve; Central bank policy rate; Europe; Global (search for similar items in EconPapers)
Pages: 45
Date: 2024-07-09
New Economics Papers: this item is included in nep-eec
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=551129 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2024/142

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().