6533b861fe1ef96bd12c5049

RESEARCH PRODUCT

Impacts of sovereign risk premium on bank profitability: Evidence from euro area

Juha-pekka JunttilaVo Cao Sang Nguyen

subject

Economics and Econometricseuroaluepankitmedia_common.quotation_subjectMonetary policySample (statistics)Monetary economicskannattavuuskorkopolitiikkaUnconventional monetary policyBanking sectorInterest ratekorkoNegative interest ratesLoanWholesale fundingEconomicsSovereign risk premiumProfitability indexBank profitabilityFinancemedia_commonCredit risk

description

We analyse the effects of low and negative interest rates and sovereign risk premium on bank profitability among 154 Eurozone banks during the period 2005–2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net interest margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results. peerReviewed

yearjournalcountryeditionlanguage
2021-01-01International Review of Financial Analysis
https://doi.org/10.1016/j.irfa.2022.102110