Open Banking and Bank Asset Quality: Suggestive Evidence from PSD2 in the European Union

This thesis examines the conditional association between the implementation of the Second Payment Services Directive (PSD2) and commercial bank asset quality and profitability in Europe. Utilizing an unbalanced bank-year panel of commercial banks across European Union member states and a control group of United States and Swiss banks from 2014 to 2024, we employ a Difference-in-Differences (DiD) framework augmented with bank fixed effects, year fixed effects, and extensive bank-level and macroeconomic controls. In our preferred, more conservative macro-adjusted specification, the estimated coefficient on PSD2 × Post is –0.018 (p < 0.05), corresponding to a decline of approximately 1.8 percentage points in the NPL ratio relative to control institutions. By contrast, the analysis does not detect a statistically significant association between PSD2 and bank Return on Assets (ROA). Subsample analyses indicate that the point estimates for the NPL reduction are larger for smaller banks, which is consistent with the theoretical information-asymmetry channel. However, this differential is not statistically robust once country-year shocks are absorbed, and the small-bank subsample is overwhelmingly composed of US observations, so this evidence should be treated as suggestive rather than definitive. These findings should be interpreted cautiously as suggestive conditional associations rather than definitive causal effects. Formal diagnostic tests reject the strict parallel trends assumption due to pre-existing divergence in NPL trajectories, reflecting the concurrent post-crisis European NPL resolution process as an important confounder. Furthermore, matching exercises reveal weak common support across treatment and control groups, and data limitations prevent direct observation of bank-level API integration or proprietary credit-scoring adjustments. Overall, the empirical patterns provide suggestive evidence consistent with information-driven credit screening improvements under mandatory open banking, while highlighting the importance of distinguishing regulatory associations from broader macroeconomic and structural clean-up dynamics.