Bank profitability in the euro area: the asymmetric effect of common supervision

The increased regulation imposed after the crisis has often been accused of overburdening banks and contributing to low profitability. The euro area adopted the Single Supervisory Mechanism [SSM] in 2014 introducing a demanding regulatory framework. The scope of this paper is to examine the effect of the SSM throughout the profitability distribution of 78 directly supervised banks. Employing unconditional quantile regression analysis with data covering the period 2011-2017, we find indications of a robust positive effect of the SSM in the lower quantiles of the profitability distribution, while the effect in the upper quantiles depends on the profitability index examined. The introduction of the SSM was also found to reduce the probability of bank insolvency, the effect being stronger for weaker banks. Such positive consequences for profitability, stability and convergence should be taken into account by regulatory authorities, especially in emerging economies when considering the next steps in bank supervision.