Bank Profitability and Financial Stability: Determinants and Interconnections

In the last 20 years the stability of banks has been affected by several events, starting with the 2007-2009 global financial crisis, then with the European sovereign debt crisis and nowadays with the uncertainties brought by COVID-19. These events have highlighted the need for a deeper understanding of the factors influencing bank's stability. The aim of this thesis is to analyse how bank profitability impacts financial stability by using empirical methodologies. The analysis is conducted by using panel regressions to examine the empirical determinants of bank risks and profitability for 73 publicly traded banks from 2007 to 2021. The analysis showed that a higher profitability is associated with a lower bank's idiosyncratic risk, instead a higher reliance on non-interest income and leverage are associated with higher risks. On the profitability side, a higher problem loans ratio and cost-to-income ratio were expected to be associated with a lower bank profitability, however the thesis was unable to confirm such hypothesis.