Regulation and supervision of the European banking industry. Does one size fit all?

Post-global financial crisis (GFC) regulatory overhauls - where uniform solutions were adopted for various types of banks - have significantly changed the environment in which banks operate. This is especially visible in the European banking industry, whose profitability has not recovered to pre-GFC levels. Therefore, our goal is to investigate whether the determinants of bank profitability fit these uniform solutions. Accordingly, we explore the profitability of European banks in various settings from 2012 to 2016, which is the period marked by tough reforms. Since a decrease in profit may be treated as a sign of financial difficulties, we model static (i.e., loss) and dynamized (i.e., loss, moderate and severe decreases in profits) indicators of bank situations based on a sample of approximately 6700 bank-year observations. Different patterns of the determinants of profit decreases are found among different types and sizes of banks. Moreover, the determinants of loss events apparently differ from those accounting for profit decreases. These findings underline that a one-size-fits-all approach to regulation and supervision is not adequate for market realities. (C) 2021 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.

Automated summary

Post-GFC regulatory overhauls have significantly changed the banking industry environment. Uniform solutions for various banks may not be suitable for market realities, as different types and sizes of banks exhibit different patterns in profitability determinants.