Impacts of sovereign risk premium on bank profitability : Evidence from euro area
Junttila, J., & Nguyen, V. C. S. (2022). Impacts of sovereign risk premium on bank profitability : Evidence from euro area. International Review of Financial Analysis, 81, Article 102110. https://doi.org/10.1016/j.irfa.2022.102110
Published inInternational Review of Financial Analysis
DisciplineTaloustiedeJyväskylä International Macro & FinancePolitiikkarelevantti taloustiede (painoala)ResurssiviisausyhteisöBasic or discovery scholarshipEconomicsJyväskylä International Macro & FinancePolicy-Relevant Economics (focus area)School of Resource WisdomBasic or discovery scholarship
© 2022 The Authors. Published by Elsevier Inc.
We analyse the effects of low and negative interest rates and sovereign risk premium on bank profitability among 154 Eurozone banks during the period 2005–2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net interest margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results. ...
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