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Stress-Testing Banks’ Profitability: The Case of French Banks

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Author Info

  • Coffinet, Jerome

    ()
    (Banque de France)

  • Lin, Surong

    (Banque de France)

Abstract

We propose a stress-testing framework to evaluate the sensitivity of banks’ profitability to plausible but severe adverse macroeconomic shocks. Specifically, we test the resilience of French banks’ profitability over the period 1993–2009. First, we identify the macroeconomic and financial variables (GDP growth, interest rate maturity spread, stock market’s volatility) and bank-specific variables (size, capital ratio, ratio of noninterest income to assets) that significantly determine banks’ profitability. Second, we propose macroeconomic stress-testing exercises showing that French banks’ profitability is resilient to major adverse macroeconomic scenarios. Specifically, our findings highlight that even severe recessions would leave the French banking system profitable.

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Bibliographic Info

Article provided by EY Global FS Institute in its journal Journal of Financial Perspectives.

Volume (Year): 1 (2013)
Issue (Month): 2 ()
Pages: 67-80

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Handle: RePEc:ris:jofipe:0018

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Keywords: bank profitability; dynamic panel estimation; stress test;

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References

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  1. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
  2. Demirguc-Kunt, Asli & Huizinga, Harry, 2000. "Financial structure and bank profitability," Policy Research Working Paper Series 2430, The World Bank.
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Cited by:
  1. Francisco Vazquez & Benjamin M. Tabak & Marcos Souto, 2010. "A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector," Working Papers Series 226, Central Bank of Brazil, Research Department.

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