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Bank profitability in the euro area in times of high inflation

Author

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  • Mislav Brkic

    (Croatian National Bank, Zagreb, Croatia)

Abstract

Following the shift in the European Central Bank's (ECB) monetary policy in mid2022, the interest income of euro area banks rose markedly, boosting their overall profitability. This paper shows that the positive impact of higher interest rates on bank profitability was amplified by the existence of abundant excess liquidity. In particular, since euro area banks held large stocks of excess liquidity, they were able to earn substantial risk-free interest income by simply putting their liquidity into the ECB’s deposit facility. In addition, due to the prolonged period of monetary expansion and zero interest rates on time deposits, the share of overnight deposits in total bank liabilities had increased significantly by the time the ECB tightened its policy. Since overnight deposits typically respond slowly to policy rate changes, such a structure of funding enabled euro area banks to enjoy comfortable net interest margins for some time.

Suggested Citation

  • Mislav Brkic, 2025. "Bank profitability in the euro area in times of high inflation," Public Sector Economics, Institute of Public Finance, vol. 49(1), pages 61-87.
    • Handle: RePEc:ipf:psejou:v:49:y:2025:i:1:p:61-87
    DOI: 10.3326/pse.49.1.3
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    More about this item

    Keywords

    inflation; monetary policy; fiscal policy; bank profitability;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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