The banking sector under pressure: an analysis of the economic viability of banks.

In the post-2007 period, European banks have underperformed their US counterparts. While policymakers already voiced concerns about European bank valuations before the pandemic, the Covid-19 crisis has pushed market-to-book ratios – a typical bank performance indicator – to new all-time lows. These low market-to-book ratios clearly indicate enduring stress in the system and imply that investors question banks’ economic viability and the long-term profitability potential of the banks’ business models. In a first work package, I assess how post-crisis regulation has affected overall bank valuations, as well as its individual components (profitability and risk). Second, I analyse the impact of the 2020 dividend ban on bank valuations, capital and lending to the real economy. This work package will empirically test the predictions of several theoretical frameworks. To address low-performance issues, policymakers are stressing the need for diversification and cross-border consolidation. Therefore, in a third work package, I investigate the impact of geographical and functional diversification on bank performance. By being the first to consider the interaction between geographical and functional diversification in a worldwide sample, I will be able to uncover the interplay between both types of diversification. These results are important not only for bank stakeholders, but also yield policy implications for supervisors.