Policy brief

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

This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 28 November 2016 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 was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). 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 to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He 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 was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

  • Maria Demertzis

    Maria Demertzis is the Deputy Director at Bruegel and part-time Professor of Economic Policy at the School of Transnational Governance at the European University Institute in Florence. 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.

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