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Banks’ Earnings: an empirical evidence of the influence of economic and financial markets factors

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  • Albert, Stéphane
  • Alexandre, Hervé

Abstract

Since the 1990s’, a relatively ample research has been undertaken regarding the measurement of the volatility of bank earnings over time. The comparison between traditional deposits-loans banking and financial activities is a further specific theme in bank performance research. Few analyses have however directly addressed the explanation of the volatility of earnings. The present paper provides with an analysis of the influence of economic and financial factors through the sub-components of net earnings. Using a panel of European banks over 2005-2010, a period of marked changes in banks’ earnings, we identify significant influences and shed a light on the sensitivity of activity types. We find that net earnings are positively influenced by GDP growth, stock markets and, for most banks, negatively by interest rates. The influence of GDP is primarily located with loan impairments but also with commissions. Stock markets support both commissions and, in a greater extent, trading. We identify a negative effect of interest rates for both net interest income and trading. Earnings associated with financial activities appear slightly more sensitive, but the resilience of more traditional banking activities is also affected by economic and financial factors. Our results also head towards more exposure of banks running significant additional equities-related commission activities and equity trading. On the other hand, exposure to changes in interest rates may mitigate the sensitivity of earnings.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/10353.

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Date of creation: May 2013
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Handle: RePEc:dau:papers:123456789/10353

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Keywords: Net interest income; bank commissions; trading; loan impairments; bank earnings; earnings volatility; risk factors; diversification; sustainability;

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  1. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
  2. Goddard, John & Molyneux, Phil & Wilson, John O S, 2004. "Dynamics of Growth and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1069-90, December.
  3. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
  4. Short, Brock K., 1979. "The relation between commercial bank profit rates and banking concentration in Canada, Western Europe, and Japan," Journal of Banking & Finance, Elsevier, vol. 3(3), pages 209-219, September.
  5. Hirtle, Beverly J. & Stiroh, Kevin J., 2007. "The return to retail and the performance of US banks," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1101-1133, April.
  6. Memmel, Christoph, 2011. "Banks' exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 282-289, February.
  7. Gallo, John G. & Apilado, Vincent P. & Kolari, James W., 1996. "Commercial bank mutual fund activities: Implications for bank risk and profitability," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1775-1791, December.
  8. Nguyen, James, 2012. "The relationship between net interest margin and noninterest income using a system estimation approach," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2429-2437.
  9. Lepetit, Laetitia & Nys, Emmanuelle & Rous, Philippe & Tarazi, Amine, 2008. "Bank income structure and risk: An empirical analysis of European banks," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1452-1467, August.
  10. Kwast, Myron L., 1989. "The impact of underwriting and dealing on bank returns and risks," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 101-125, March.
  11. Castrén, Olli & Dées, Stéphane & Zaher, Fadi, 2008. "Global macro-financial shocks and expected default frequencies in the euro area," Working Paper Series 0875, European Central Bank.
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