What impact does the ECB’s quantitative easing policy have on bank profitability?

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What impact does the ECB’s quantitative easing policy have on bank profitability?

This Policy Contribution shows that the effect of the ECB’s QE programme on bank profitability has not yet had a dramatically negative effect on bank

Publishing date: 30 November 2016
Authors: Guntram B. Wolff Maria Demertzis

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This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the between ECON and the European Central Bank. Copyright remains with the European Parliament at all times.

Quantitative easing (QE) affects banks’ profitability in three main ways.

First, as QE drives up bond prices, banks holding such bonds see their balance sheets strengthened.
Second, QE reduces long-term yields and thereby reduces term spreads. With this, the lending-deposit ratio spread falls, making it harder for banks to generate net interest income on new loans.
Last, QE improves the economic outlook, which should help banks exposed to the economy find new lending opportunities and should reduce problems with non-performing loans. The effects of QE on bank profitability are therefore not one directional. If anything, the immediate effect should be positive.

Banks themselves have been quite negative about the impact of QE on their net interest income, but they have also acknowledged its positive impact on capital gains (ECB Bank Lending Survey).

Lending-deposit spreads for new lending have fallen significantly. Looking at actual bank profits, net interest income has been stable. Moreover, bank profitability has increased mostly as a result of efforts to clean balance sheets of impaired assets (at least until the end of 2015). This is consistent with a reduction in non-performing loans (NPLs), particularly in countries where NPL levels were abnormally high.

Moreover, we show that bank profitability in some countries has been a concern for many years now, starting well before the QE programme. The main drivers of low profitability have been non-performing loans, legal risks and other problems unrelated to net interest income, which has remained fairly stable.

Overall, the authors cannot yet see any major bank profitability issue arising out of the ECB’s QE programme.

Erratum: Figure A1 in the appendix was wrongly calculated and is now corrected. Corresponding text on the first page of the paper is also amended.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.
Maria Demertzis

Maria Demertzis is a Leader at ESF, The Conference Board Europe, former Senior fellow at Bruegel and part-time Professor of Economic Policy at the Florence School of Transnational Governance at the European University Institute. She was Bruegel’s Deputy Director until December 2022. She has previously worked at the European Commission and the research department of the Dutch Central Bank. She has also held academic positions at the Harvard Kennedy School of Government in the USA and the University of Strathclyde in the UK, from where she holds a PhD in economics. She has published extensively in international academic journals and contributed regular policy inputs to both the European Commission's and the Dutch Central Bank's policy outlets. She contributes regularly to national and international press and has regular column that appears twice a month in various EU newspapers and on Bruegel’s opinion page.