IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v47y2025i1p64-77.html
   My bibliography  Save this article

Inflation's dual impact on European banks' profitability

Author

Listed:
  • Karkowska, Renata
  • Korzeb, Zbigniew
  • Niedziółka, Paweł

Abstract

Geopolitical risks have sharply heightened inflationary pressures across global economies, posing significant challenges to the banking sector. This study investigates the complex impact of inflation on banks, focusing on the dual effect of rising inflation on bank performance. On one hand, our analysis of 196 commercial banks from 31 European countries reveals that inflation drives an increase in both interest and non-interest incomes, bolstering banks' revenue streams. On the other hand, this same inflationary pressure leads to a deterioration in efficiency ratios, indicating a decline in operational efficiency. This paradox highlights a critical issue for the banking sector: while banks may experience short-term revenue gains, their overall efficiency suffers, potentially undermining long-term stability. Our findings underscore the importance of coordinated monetary and macroprudential policies to mitigate these effects and suggest that supervisory policies favoring consolidation initiatives could offer a pathway to enhanced efficiency in an inflationary environment.

Suggested Citation

  • Karkowska, Renata & Korzeb, Zbigniew & Niedziółka, Paweł, 2025. "Inflation's dual impact on European banks' profitability," Journal of Policy Modeling, Elsevier, vol. 47(1), pages 64-77.
    • Handle: RePEc:eee:jpolmo:v:47:y:2025:i:1:p:64-77
    DOI: 10.1016/j.jpolmod.2024.11.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893825000018
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2024.11.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    European banking; inflation; performance; profitability;
    All these keywords.

    JEL classification:

    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:47:y:2025:i:1:p:64-77. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.