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An inquiry into the determinants of the profitability of Italian banks

Author

Listed:
  • Ugo Albertazzi

    () (Bank of Italy)

  • Alessandro Notarpietro

    () (Bank of Italy)

  • Stefano Siviero

    () (Bank of Italy)

Abstract

This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy’s Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.

Suggested Citation

  • Ugo Albertazzi & Alessandro Notarpietro & Stefano Siviero, 2016. "An inquiry into the determinants of the profitability of Italian banks," Questioni di Economia e Finanza (Occasional Papers) 364, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_364_16
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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2016-0364/QEF_364_16.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:psl:moneta:2017:42 is not listed on IDEAS
    2. Alessandro Notarpietro & Lisa Rodano, 2016. "The evolution of bad debts in Italy during the global financial crisis and the sovereign debt crisis: a counterfactual analysis," Questioni di Economia e Finanza (Occasional Papers) 350, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    bank profits; bank capital; non-performing loans; Italian banks; Italian economy;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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