European Banks’ Profitability and Sentimental Cycle Available to Purchase

Utilizing bank-level data and a Mixed Frequency VAR approach, this study examines the effects of a shock at the economic sentiment on European banks’ profitability during the 1995–2019 period. We find that a greater shock in economic sentiment leads to a persistent and gradually amplified stimulation of banks’ profitability. Our findings extend previous evidence on the determinants of bank profitability and have important policy implications. First, macroprudential policymakers and regulators should design and implement a regulatory framework that has an especial focus on economic sentiment accompanied by the usual bank-specific or macroeconomic-specific fundamentals to facilitate the existence of higher profitability in the banking industry. Second, banks’ management (Boards, Risk Committees, and executive management) should embrace a more forward-looking philosophy and implement sentiment indicators to their strategy to achieve sustainability.