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Does ‘Too High’ Profitability Hamper Stability for European Banks?

Author

Listed:
  • P. Pessarossi
  • J.-L. Thevenon
  • L. Weill

Abstract

We investigate how high profitability influences the occurrence of bank distress in Europe. We utilize four indicators for ‘too high’ profitability, defined as the top quantiles of earnings, in logit models to explain bank distress with a hand-collected dataset of European bank distresses over the 2001-2014 period. We test the hypothesis that profitability can be beneficial for stability until a certain level but can turn detrimental at high level. We find that ‘too high’ profitability does not reduce the occurrence of bank distress. We obtain limited evidence that the top quantiles of the profitability distribution can lead to enhance such occurrence through a time horizon of about 3 years. With the hindsight of the Great Financial Crisis, our findings therefore qualify the view that bank profitability only should be promoted to favor bank stability.

Suggested Citation

  • P. Pessarossi & J.-L. Thevenon & L. Weill, 2017. "Does ‘Too High’ Profitability Hamper Stability for European Banks?," Débats économiques et financiers 31, Banque de France.
    • Handle: RePEc:bfr:decfin:31
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    Cited by:

    1. Henri Fraisse & Christophe Hurlin, 2024. "Modèles internes des banques pour le calcul du capital réglementaire (IRB) et intelligence artificielle," Débats économiques et financiers 44, Banque de France.
    2. Cyril Pouvelle., 2022. "An Analysis of Financial Conglomerate Resilience: A Perspective on bancassurance in France [Une analyse de la résilience des conglomérats financiers : Une perspective sur la bancassurance en France," Débats économiques et financiers 39, Banque de France.
    3. Aurélien Violon & Dominique Durant & Oana Toader, 2018. "The Impact of the Identification of GSIBs on their Business Model," Débats économiques et financiers 33, Banque de France.
    4. Eric Monnet, & Angelo Riva, & Stefano Ungaro., 2021. "The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931) [Les effets réels des ruées bancaires : l’exemple de la Grande Dépression en France (1930-1931)]," Débats économiques et financiers 37, Banque de France.

    More about this item

    Keywords

    Bank profitability; financial distress; financial stability.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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