What drives bank earnings? Evidence for 28 banking sectors

Abstract

The crisis has revived interest in the determinants of bank earnings. We investigate the relationship between profitability and balance sheet composition of 28 national banking sectors. Using Statistical Cost Accounting, we find a plausible pattern of individual assets’ and liabilities’ contributions to earnings and costs. Both wholesale and retail activities yield positive margins, while interbank lending and customer deposits are the most expensive funding sources. Wholesale finance has a positive effect on profitability, which may explain banks’ increasing reliance on it prior to the crisis. Economic growth and unemployment have a procyclical impact, while inflation tends to erode profitability.

Keywords:

• banking
• earnings
• social cost accounting
• credit crisis

JEL Classification:

• G21
• G32

Notes

¹Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Russian Federation, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and the United States.