The Single Supervisory Mechanism and its implications for the profitability of European banks

Abstract

The scope of this paper is to examine if and how the establishment of the Single Supervisory Mechanism (SSM) influenced the profitability of European banks. To do so, we employ the returns on assets and equity as alternative indicators for profitability. Using data for 344 European banks in 2011-2017 we apply the difference-in-differences methodology combined with matching techniques. Our main findings indicate a statistically significant and positive effect on profitability for the directly supervised banks, especially banks located in the periphery of the euro area, implying that institutional improvements introduced by the SSM were beneficial not only for strengthening stability and increasing credibility but also for improving performance and enhancing integration.

Asymmetries in the Euro area banking profitability

“…Similar to previous research (e.g., Avgeri et al, 2021;Demirgüç-Kunt and Huizinga, 2010;García-Herrero et al, 2009;Iannotta et al, 2007), we find that business cycle fluctuations and favorable economic conditions foster banks' higher returns. The evidence is in the positive and significant relationship between GDP growth and banks' profitability.…”

“…et al (2008),Avgeri et al (2021), andElekdag et al (2020) find similar results, which reinforces the notion that efficient cost management is determinant to increase the profitability of banks in the Euro area. Consistent with Ahamed (2017), Demirgüç-Kunt and Huizinga (2010), and Stiroh (…”

“…Other previous research on the determinants of the profitability of European banks focus this issue either from a single-country perspective (e.g., Athanasoglou et al, 2006;Iannotta et al, 2007;Mergaerts and Vennet, 2016), or consider Europe as a whole (e.g., Athanasoglou et al, 2008;Chiorazzo et al, 2008;Dietrich and Wanzenried, 2011;Elekdag et al, 2020), ignoring its asymmetries. Alternatively, the asymmetries are investigated, but the focus relies primarily on the effect of a policy change, such as the introduction of the SSM, on bank 4 profitability, supported on the argument that the price of greater resilience achieved through these reforms imposed a cost on bank profits (Avgeri et al, 2021).…”

The ECB Single Supervisory Mechanism: Effects on Bank Performance and Capital Requirements

“…Hence, under SSM supervision the profitability of SSM banks increased without more risk-taking as measured by the average risk weight. Avgeri et al (2021) differentiate between peripheral and core countries of the euro zone because of financial fragmentation. Therefore, as a robustness check, we split our sample into the same core countries (Austria, Belgium, Estonia, Germany, Finland, France, the Netherlands, and Slovakia) and periphery countries (Cyprus, Greece, Ireland, Italy, Malta, Portugal, Slovenia, and Spain) as in Avgeri et al (2021).…”

“…Avgeri et al (2021) differentiate between peripheral and core countries of the euro zone because of financial fragmentation. Therefore, as a robustness check, we split our sample into the same core countries (Austria, Belgium, Estonia, Germany, Finland, France, the Netherlands, and Slovakia) and periphery countries (Cyprus, Greece, Ireland, Italy, Malta, Portugal, Slovenia, and Spain) as in Avgeri et al (2021). 19 When we run our regressions for the two subsamples, we find statistically significant SSM effects for both groups of countries (Table E.22 in Appendix E).…”