On the Legacy of Negative Interest Rates to the Profitability of European Banking Sector

We identify the most significant factors that have influenced the profitability of European banking sector during the negative interest rate period (NIRP), with a particular focus on the bank size, loan portfolio quality, ownership structure, and location. Based on a panel dataset from 560 banks and 35 countries for the years 2010 – 2019, excluding the pandemic years, we show that especially the loan portfolio quality has had significant, but varying effects on the bank profitability. For shareholder banks in the euro area and co-operative and savings banks outside the euro area, it has been profitable to increase the loan portfolio riskiness during the NIRP. Our results also indicate that banks with different characteristics are affected by different factors. Therefore, banks should make decisions for the profitability management based on their unique characteristics rather than following other banks' examples. One of our main policy recommendations is that when the banking regulators and policy makers are considering new steps to prevent the emergence of banking crises in the future, they should carefully also consider the ownership structure and geographic location of the banks when formulating policies to enhance bank profitability and hence, stability. Since the variables affecting bank profitability are largely dependent on the ownership structure and whether the bank is domiciled in the euro area or not, policies need to be tailored accordingly