Economic and financial debates no. 31: Does ‘Too High’ Profitability Hamper Stability for European Banks?
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.
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- Published on 12/26/2017
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Updated on: 12/26/2017 17:38