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Monetary winds of change: Exploring the link between policy shifts and bank profitability in developed and emerging European markets

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  • Raftis, Achilleas
  • Karpetis, Christos
  • Papadamou, Stephanos
  • Spyromitros, Eleftherios

Abstract

This paper investigates the complex relationship between monetary policy and bank profitability by analyzing yearly data from 903 credit institutions across 36 European nations throughout the period of 2005 to 2021, utilizing the two-step system GMM technique. We undertake a comparative analysis to investigate the effects of monetary policy on both developed European and Central, Eastern, and Southeastern European (CESEE) countries. Additionally, we examine the impacts of negative interest rate policies (NIRPs) using a comprehensive dataset that incorporates the latest available information, to observe heterogeneities among time periods and countries. We find that the influence of monetary policies on profits and margins is generally insignificant or moderate, with the exception of ROA in CESEE countries. This highlights the potential benefits for banks in the CESEE region in an environment where there is a significant difference between short-term and long-term interest rates. However, it also raises doubts about the effectiveness of NIRPs that have been adopted in recent years. The remaining results of our analysis indicate that loan loss provisions and cost-to-income are the primary determinants of bank profitability across all scenarios. This underscores the significance of effective provisioning practices and operational efficiency.

Suggested Citation

  • Raftis, Achilleas & Karpetis, Christos & Papadamou, Stephanos & Spyromitros, Eleftherios, 2024. "Monetary winds of change: Exploring the link between policy shifts and bank profitability in developed and emerging European markets," Global Finance Journal, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:glofin:v:59:y:2024:i:c:s1044028324000048
    DOI: 10.1016/j.gfj.2024.100932
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    Keywords

    Monetary policy; Bank profitability; CESEE countries; Negative interest rate policies;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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