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Determinants of bank performance: evidence from replicating portfolios

Author

Listed:
  • Altavilla, Carlo
  • Burlon, Lorenzo
  • Hünnekes, Franziska
  • Begenau, Juliane

Abstract

We construct a novel measure of bank performance, investigate its determinants, and show that it affects bank resilience, lending behaviour and real outcomes. Using confidential and granular data, we measure performance against a market-based benchmark portfolio that mimics individual banks’ interest rate and credit risk exposure. From 2015 to mid-2022, euro area banks underperformed market benchmarks by around e160 billion per year, amid substantial heterogeneity. Structural factors, such as cost inefficiencies, rather than monetary or regulatory measures, were the main driver of bank underperformance. We also show that higher edge banks are less reliant on government support measures and less likely to experience the materialisation of interest rate or credit risk when hit by shocks. Using the euro area credit register and the pandemic shock for identification, we find that higher edge banks originate more credit, direct it towards more productive firms, and support more firm investment. JEL Classification: E52, G12, G21, G28

Suggested Citation

  • Altavilla, Carlo & Burlon, Lorenzo & Hünnekes, Franziska & Begenau, Juliane, 2024. "Determinants of bank performance: evidence from replicating portfolios," Working Paper Series 2937, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20242937
    Note: 2279334
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    References listed on IDEAS

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    More about this item

    Keywords

    banking; credit supply; maturity transformation; replicating portfolio;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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