The determinants of performance in the Eurozone banking sector: Core versus periphery Eurozone economies

Abstract

Abstract In the present study we provide a thorough analysis of the effects that a group of bank‐specific as well as industry‐specific determinants along with the regulatory framework developed under the three pillars of Basel II agreement (capital stringency, official disciplinary power and private monitoring) have on the performance of Eurozone banking sector over the period 2007–2016. To this end, we conduct a systematic comparative analysis of the determinants of the performance of the banking sector in periphery Eurozone countries (Greece, Italy, Portugal, Spain) versus banks operating in core Eurozone economies (Germany, France). We provide evidence that is consistent with the argument that banks financed with short‐run capital market funding are more fragile. A further finding of our analysis shows that banks operating in countries which have a more restrictive regulatory framework on banking activities perform better. In addition, it is shown that the better‐performing banks have more equity. Finally, the estimation of the appropriate dynamic models we argue that bank performance is affected by bank‐specific determinants like equity capital and bank size, while the regulatory framework as well as macroeconomic variables play a crucial role.

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