Covid-19 impact on the profitability of the EU27 banking sector

Abstract

Due to COVID-19, economic activity decreased considerably all across Europe. Our paper reviews the various pandemic effects and changes in the European banking sector. Using a dataset merged from four different secondary databases, we created a panel of countryquarters with 513 items covering the period 2016 Q1 – 2020 Q3 including the effects of the first wave of the pandemic. Correlation analysis revealed that during the pandemic, the connectedness of the banking system to the macroeconomy increased, and that the open economies had a more stable banking system. Performance fluctuations on the national banking system level increased, and banking performance became more closely linked to quarterly GPD growth. Covid-19 had a significant adverse effect on the banking sector's profitability on top of the standard macroeconomic fallbacks. Data also underpin that the countries where citizens had stronger trust in their government (political system, legal system, police) suffered less due to the Covid-19 crisis than other EU27 members. High-trust EU27 countries lost less in GDP, import, export, and banking profitability during the first wave of the pandemic. However, this might be partly also a result of some cultural characteristics linked to geography.