DRIVERS OF PROFIT CONVERGENCE IN EURO AREA BANKS

Abstract

Since there are persistent concerns about the viability of euro area banks, we analyse their profit recovery in the post-crisis period, applying the concepts of β and σ convergence as well as the Phillips and Sul clustering algorithm. The results are consistent with ROE convergence, but to different levels across bank groups. The clustering analysis reveals the existence of banks with solid performance, but also a group of persistent underperformers. We find that non-interest income and operational efficiency emerge as crucial discriminating factors to explain the banks’ relative post-crisis ROE dynamics. Supervisors and bank managers are advised to monitor and reinforce bank business model viability.