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What drives bank earnings? Evidence for 28 banking sectors

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  • Laurence Pouw
  • Jan Kakes

Abstract

The crisis has revived interest in the determinants of bank earnings. We investigate the relationship between profitability and balance sheet composition of 28 national banking sectors. Using Statistical Cost Accounting, we find a plausible pattern of individual assets’ and liabilities’ contributions to earnings and costs. Both wholesale and retail activities yield positive margins, while interbank lending and customer deposits are the most expensive funding sources. Wholesale finance has a positive effect on profitability, which may explain banks’ increasing reliance on it prior to the crisis. Economic growth and unemployment have a procyclical impact, while inflation tends to erode profitability.

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  • Laurence Pouw & Jan Kakes, 2013. "What drives bank earnings? Evidence for 28 banking sectors," Applied Economics Letters, Taylor & Francis Journals, vol. 20(11), pages 1062-1066, July.
    • Handle: RePEc:taf:apeclt:v:20:y:2013:i:11:p:1062-1066
    DOI: 10.1080/13504851.2013.783676
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    References listed on IDEAS

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    1. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    2. Bolt, Wilko & de Haan, Leo & Hoeberichts, Marco & van Oordt, Maarten R.C. & Swank, Job, 2012. "Bank profitability during recessions," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2552-2564.
    3. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    4. Kyriaki Kosmidou & Fotios Pasiouras & Jordan Floropoulos, 2004. "Linking profits to asset-liability management of domestic and foreign banks in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 14(18), pages 1319-1324.
    5. Bourke, Philip, 1989. "Concentration and other determinants of bank profitability in Europe, North America and Australia," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 65-79, March.
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    Cited by:

    1. Leo Haan & Jan Kakes, 0. "European banks after the global financial crisis: peak accumulated losses, twin crises and business models," Journal of Banking Regulation, Palgrave Macmillan, vol. 0, pages 1-15.
    2. Janda, Karel & Van Tran, Quang & Zetek, Pavel, 2014. "Influence of External Funding on Microfinance Performance," MPRA Paper 58170, University Library of Munich, Germany.
    3. Leo Haan & Jan Kakes, 2020. "European banks after the global financial crisis: peak accumulated losses, twin crises and business models," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(3), pages 197-211, September.
    4. Freeman Brobbey Owusu & Abdul Latif Alhassan, 2021. "Asset‐Liability Management and bank profitability: Statistical cost accounting analysis from an emerging market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1488-1502, January.
    5. Janda, Karel & Tran, Quang & Zetek, Pavel, 2014. "Vliv externího financování na mikrofinanční rozvoj - makro perspektiva [Influence of external funding on microfinance performance - macro perspective]," MPRA Paper 58166, University Library of Munich, Germany.

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