Bank Profitability During Recessions

The current banking crisis and the concurrent severe economic recession revive the interest in the issue of cyclical behaviour of bank profitability. Our paper contributes to previous research on this topic in three different respects. First, we not only estimate the cyclical behaviour of total profits, but also of the three components that define it: net interest income, other income, and net provisioning plus operational costs. Second, we do this for two types of unbalanced panel data: aggregate bank data for 17 countries over three decades and individual bank data for 19 countries over a period of 18 years, respectively. Third, we assess whether the degree of pro-cyclicality of bank profitability is stronger for deep recessions than for mild ones. Our results confirm that bank profits are pro-cyclical and find that this pro-cyclicality is stronger for deep recessions than for mild ones. This asymmetric effect is found both using aggregate and bank specific data. Among the different components of bank profits, net provisioning is the driver behind this asymmetry.