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Stress testing banks' profitability: the case of French banks

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Author Info

  • Coffinet, J.
  • Lin, S.

Abstract

We build 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 using supervisory data 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 non interest income to assets) that significantly affect French banks’ profitability. Second, our macroeconomic stress testing exercises based on a simulation of macroeconomic variables show 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

Paper provided by Banque de France in its series Working papers with number 306.

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Length: 52 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:306

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: bank profitability; dynamic panel estimation; stress test.;

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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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