The profitability of significant credit institutions within the euro area

Abstract

This study empirically analyses a set of selected determinants of profitability (bankspecific, industry-specific and macroeconomic) for a sample of 39 significant credit institutions, operating in 17 European Member States and that will be directly supervised by the European Central Bank, over the period from 2005 to 2013. This study also investigates the impact of the recent financial crisis on the profitability of euro area significant credit institutions. To achieve the aims and objectives of this dissertation a panel data model is estimated using a least square fixed effects model. This study finds that the profitability of significant credit institutions is influenced by both bank-specific and external macro-economic factors. Banking sector concentration is found to have the largest positive statistically significant impact on return on average assets and equity whereas the cost-to-income ratio is found to have a negative impact on bank profitability. On the other hand, bank assets size and the rate of inflation have no influence on bank profitability. Finally, as expected, the global financial crisis impacted negatively on the profitability of significant credit institutions in the euro area. The main contribution of this thesis is that it is the first study, as far as we are aware, to examine the factors influencing the profitability of significant credit institutions that will be directly supervised by the ECB.