Abstract
Given the high resilience of the Central and Eastern Europe (CEE) banking sectors during the last financial crisis and their major role in the CEE region in financing the economy and supporting the high growth rates achieved there, our paper investigates the determinants of banking profitability in the CEE banking sectors based on a Generalized Method of Methods (GMM) approach using data between 2009 and 2018. We have selected determinants from the macroeconomic factors and from the financial-banking specific factors using a two-step GMM method. Our findings demonstrate that unemployment rate, inflation, budget balance, non-governmental credit, non-performing loan rates, concentration rate and capitalization rate negatively impact on the banking profitability in the CEE banking sectors. According to these findings, some policy recommendations were elaborated.
Highlights
The banking sector plays an important role in the development of the entire economy.It supported the high economic growth rates in the Central and Eastern Europe (CEE)region before the 2008 crisis, by loans that fueled private consumption
The CEE banking sectors proved to be very resilient during the 2008 crisis, comparative to the Western European banking sectors, because of their sound capitalization, tight regulation and high profitability rates achieved before the crisis
We present the results of our analysis in two steps: first, we undertake a comprehensive investigation of banking systems’ profitability dynamics in CEE countries between 2009 and 2018, which highlights the similarities and differences between economies; second, we show and discuss the results of our panel regressions in Generalized Method of Methods (GMM) framework, which link banks’ profitability to financial systems’ attributes and macroeconomic characteristics
Summary
The banking sector plays an important role in the development of the entire economy.It supported the high economic growth rates in the Central and Eastern Europe (CEE)region before the 2008 crisis, by loans that fueled private consumption. The banking sector plays an important role in the development of the entire economy It supported the high economic growth rates in the Central and Eastern Europe (CEE). Mihajlović and Jovic (2017) have demonstrated, in their study on CEE banking sectors during 2009–2015, the interplay between the macroeconomic frame and banking sectors They proved that sustainable economic growth supports the development of the banking sector, which, in turn, contributes to the successful economic growth and development. They have shown that the high NPL in the CEE region affected the profitability ratios of the CEE banking systems during the last financial crisis and during the post-crisis period The CEE banking sectors proved to be very resilient during the 2008 crisis, comparative to the Western European banking sectors, because of their sound capitalization, tight regulation and high profitability rates achieved before the crisis.
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