Download publication

Policy Contribution

What impact does the ECB’s quantitative easing policy have on bank profitability?

This Policy Contribution shows that the effect of the ECB’s QE programme on bank profitability has not yet had a dramatically negative effect on bank operations.

By: and Date: November 30, 2016 European Macroeconomics & GovernanceEuropean ParliamentParliamentary Testimonies Tags & Topics

This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 28 November 2016 between ECON and the European Central Bank. Copyright remains with the European Parliament at all times.

Quantitative easing (QE) affects banks’ profitability in three main ways.

  • First, as QE drives up bond prices, banks holding such bonds see their balance sheets strengthened.
  • Second, QE reduces long-term yields and thereby reduces term spreads. With this, the lending-deposit ratio spread falls, making it harder for banks to generate net interest income on new loans.
  • Last, QE improves the economic outlook, which should help banks exposed to the economy find new lending opportunities and should reduce problems with non-performing loans. The effects of QE on bank profitability are therefore not one directional. If anything, the immediate effect should be positive.

Banks themselves have been quite negative about the impact of QE on their net interest income, but they have also acknowledged its positive impact on capital gains (ECB Bank Lending Survey).

Lending-deposit spreads for new lending have fallen significantly. Looking at actual bank profits, net interest income has been stable. Moreover, bank profitability has increased mostly as a result of efforts to clean balance sheets of impaired assets (at least until the end of 2015). This is consistent with a reduction in non-performing loans (NPLs), particularly in countries where NPL levels were abnormally high.

Moreover, we show that bank profitability in some countries has been a concern for many years now, starting well before the QE programme. The main drivers of low profitability have been non-performing loans, legal risks and other problems unrelated to net interest income, which has remained fairly stable.

Overall, the authors cannot yet see any major bank profitability issue arising out of the ECB’s QE programme.

Erratum: Figure A1 in the appendix was wrongly calculated and is now corrected. Corresponding text on the first page of the paper is also amended.

View comments
Read article More on this topic More by this author

Opinion

Nicolas Véron

ECB finally addressing Italian bank woes

Italy’s banking problem has been left unaddressed for too long. Similar to Japan in the 1990s, it is best understood as a combination of structural and cyclical factors.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: January 4, 2017
Read article More on this topic

Opinion

MariaDemertzis1 bw
Guntram B. Wolff

Eurozone QE and bank profitability: Why it is too early to taper

In the eyes of the critics, the quantitative easing programs have been of little help to growth and inflation and have instead been an attack on savers, undermining the profitability of banks and insurances. Do these arguments stand scrutiny?

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 8, 2016
Read article More on this topic More by this author

Blog Post

sd-12177-_0028bea2-web

Can public support help Europe build distressed asset markets?

Distressed asset investors can relieve banks of their NPL overhang and offer valuable restructuring expertise, although banks will need to realise a further valuation loss. Regulators could do a lot to support the growth of this market.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: November 29, 2016
Read article More on this topic

Blog Post

Pia Hüttl
Silvia Merler

An update: Sovereign bond holdings in the euro area – the impact of QE

Since the ECB’s announcement of its QE programme in January 2015, national central banks have been buying government and national agency bonds. In this post we look at the effect of QE on sectoral holdings of government bonds, based on our recently updated dataset.

By: Pia Hüttl and Silvia Merler Topic: European Macroeconomics & Governance Date: November 22, 2016
Read article More on this topic More by this author

Blog Post

Schoenmaker pic

Stealing London’s financial crown would bring both benefits and responsibilities

After Brexit, several major cities across the EU27 are looking to take over London's financial activity. While there are plenty of benefits in hosting a major financial centre, it also comes with significant risks and responsibilities.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: November 17, 2016
Read article Download PDF More on this topic More by this author

External Publication

claeys-ref-2016

What role for the financial markets in Europe?

The European European financial system is too strongly bank-based. How can it be rebalanced to become favourable to growth and employment again? (This paper is only available in French).

By: Grégory Claeys Topic: Finance & Financial Regulation Date: November 16, 2016
Read article More on this topic More by this author

Opinion

Silvia Merler

An Italian take on banking crisis

The year 2016 has not been good to Italian banks. While resilient to the first wave of financial crisis in 2008, due to their low exposure to US sub-prime products and to the fact that Italy did not have a pre-crisis housing bubble, they have been suffering much from the euro sovereign crisis and the ensuing deteriorating economic conditions.

By: Silvia Merler Topic: Finance & Financial Regulation Date: October 27, 2016
Read article More on this topic More by this author

Opinion

Nicolas Véron

Breaking the vicious circle

Nicolas Véron argues that EU banking union can only be complete if the vast amounts of domestic sovereign debt held by many banks are reduced

By: Nicolas Véron Topic: Finance & Financial Regulation Date: October 21, 2016
Read article More on this topic More by this author

Blog Post

MariaDemertzis1 bw

A framework for thinking about bad loans

An important guiding principle in resolving non-performing loans (NPLs) should be to ensure that viable debt remains serviced, while non-viable debt gets resolved. We present here a framework to approach the issue.

By: Maria Demertzis Topic: Finance & Financial Regulation Date: October 18, 2016
Read article More by this author

Blog Post

Silvia Merler

The Deutsche Bank Frenzy and what it says about European banks

What’s at stake: The IMF recently published its Fall Global Financial Stability Report, which points to a decrease in short-term risk but building of medium-term ones. At the same time, European market has been nervous last week on the news that Deutsche Bank (Germany’s biggest bank) has been demanded USD14bn by the US Department of Justice to settle allegations that the bank mis-sold mortgage-backed securities before the financial crisis. While reports point to a possible USD5.4bn settlement, this turmoil raises a question of whether the European financial system is still weak, eight years since the crisis. We try to summarize the reactions in the blogosphere.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 10, 2016
Read article Download PDF More on this topic

Policy Contribution

pc-17-16

Fiscal capacity to support large banks

This Policy Contribution outlines a fiscal cost scenario for the recapitalisation of large banks during a severe systemic crisis.

By: Pia Hüttl and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: October 3, 2016
Read article More on this topic More by this author

Blog Post

Nicolas Véron

The City will decline—and we will be the poorer for it

Just as the City owes much of its current awe-inspiring prosperity to European integration, the brutal realities of Brexit will make it shrink, not thrive. All this is bleak news, not just for the City but for the UK's economy.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: September 14, 2016
Load more posts