What drives banking profitability after the international financial crisis of 2008? Evidence from Eurozone banks

Abstract

Ten years after the financial crisis of 2008 significant efforts have been made both in
financial and economic research to study the effect of crises on the stability of the
banking system. This article reviews the main determinants of banks’ profitability
in 50 banks from the five largestEuropean economies, including Germany, the UK,
Spain, Italy, and France, over the period 2007–2013. Using random effects regressions,
as well as a dynamic panel data estimation, we split the factors that influence bank
profitability into three groups: bank-specific factors (equity to total assets ratio, bank
capital over total assets, liquidity, credit risk, and bank size), macroeconomic factors
(real Gross Domestic Product and inflation), and institutional factors (independence
of supervisory authority and restrictions on banking activities).
The empirical findings indicate that during a period of crisis, bank profitability is
only driven by capital adequacy ratio. However, all other bank-specific variables
have a negative impact. Macroeconomic conditions can have adverse effects during
crises. Results show that economic growth negatively affects the performance of
the largest European banks. However, inflation is significantly and positively associated
with bank returns.