EFFECT OF BUSINESS CYCLE AND ECONOMIC LIBERALIZATION ON EUROPEAN BANKING PERFORMANCE

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We investigate the impact of the business cycle and economic freedom on banking profitability and risk-taking, using a dynamic panel of 722 European commercial banks covering the period 1999-2013. Findings show that banking efficiency is pro-cyclical. In addition, financial freedom and monetary freedom reduce profitability and increase risk-taking by commercial banks. However, freedom from corruption and fiscal freedom enhance profitability and reduce banking risk. We conclude that the effect of economic growth on banking profitability and risk-taking by commercial banks is pro-cycle before and after the 2007 financial crisis. However, economic openness encourages risk-taking after this crisis. Thus, banking efficiency depends on banks’ size and economic liberalization degree. The heterogeneity between euro area countries could be explained by risk-taking cultures and banking governance structures.

Author(s):

Faten Ben Bouheni    
ISC PARIS BUSINESS SCHOOL
France