Understanding the Dynamics of Credit Risk Management and Bank Profitability: Evidence from European Banking Institutions

Abstract

This study examines the relationship between credit risk management and bank profitability in Europe, focusing on NPLR, LLPR, and CAR as credit risk indicators, and ROA and ROE as profitability indicators. Using panel data regression, we analyze data from 509 European banks over the period 2010-2022. Our findings reveal a statistically significant negative association between NPLR and LLPR with ROA and ROE, indicating that higher levels of non-performing loans and loan loss provisions reduce bank profitability. Conversely, we find a positive relationship between CAR and ROA, suggesting that stronger capital adequacy enhances profitability. Overall, the findings suggest that stricter bank regulations could be beneficial not only for the financial stability of Europe and reducing the risk of costly banking crises, but also for banks individually.