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Bank Profitability during Recessions

  • Wilko Bolt
  • Leo de Haan
  • Marco Hoeberichts
  • Maarten van Oordt
  • Job Swank

This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank's lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 251.

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Date of creation: Jul 2010
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Handle: RePEc:dnb:dnbwpp:251
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