Bank profitability in the Eurasian Economic Union: Do funding liquidity and systemic importance matter?

The post-crisis regulatory architecture targets greater banking stability by imposing additional capital and liquidity requirements. Profit persistence, however, remains an important factor for attaining this goal. Using annual data for 2008–2017, this study analyzes the relationship between funding stability, systemic importance, and the profitability of banks in the three founding states of the Eurasian Economic Union (EAEU): Russia, Kazakhstan, and Belarus. The results show a strong degree of stability in net interest margin (NIM) and a lack of persistence in return on assets (ROA). Compliance with the minimum level of the Net Stable Funding Ratio (NSFR) reduces both the funding liquidity risk and the NIM of EAEU banks. Moreover, systemically important banks in the region historically operate at a lower interest spread and less prudent NSFR, which implies a potentially greater adverse effect on their NIM. Bank-specific variables have various impacts depending on the measure of profitability. The results also highlight that greater market concentration protects the NIM and negatively impacts the ROA of EAEU banks. Finally, Western sanctions have a destabilizing effect on the NIM of EAEU banks, but not on systemically important banks.