European bank profitability: The great convergence?

Have euro area banks restored viability in the post-crisis era? We investigate profitability convergence for euro area banks over the period 2009-2020 using the concepts of beta and sigma convergence and a club clustering algorithm. Our evidence is consistent with a slow catch up of the weaker banks, but we also document that better performing banks converge towards a lower profit level, suggesting a 'great convergence' towards the middle. Moreover, we identify a cluster of banks exhibiting dismal profit dynamics, characterized by high cost-to-income and non-performing loans ratios, indicating the need for a restructuring of part of the euro area banking sector.

Automated summary

By investigating profitability convergence of euro area banks from 2009 to 2020, we find that weaker banks are slowly catching up, while better performing banks are converging towards a lower profit level, indicating a 'great convergence' towards the middle. Additionally, we identify a cluster of banks with dismal profit dynamics, characterized by high cost-to-income and non-performing loans ratios, highlighting the need for restructuring in the euro area banking sector.