Divergent Effects of Economic Policy Uncertainty on European Banks Profitability: Role of Capital Adequacy Ratio

This study aims to shed light on how economic policy uncertainty (EPU) affects the profitability of European banks across various banking groups and how capital adequacy ratio (CAR) moderates this relationship. Quantile regression analysis is used to analyze the relationship for 3941 yearly observations for the period from 2010 to 2020 for banks in 12 European countries. The findings indicate that the impact of EPU on profitability differs significantly depending on the kind of bank. For instance, while Investment and Saving Banks remain unaffected or even profit from greater EPU, Bank Holdings, Commercial Banks, Real Estate and Mortgage Banks, and Islamic Banks all see a decline in profitability due to EPU. CAR moderates the negative relationship between EPU and bank profitability, but the impact is asymmetrical among different types of banks. Overall, the paper's findings emphasize how crucial bank-specific traits like institutional framework, business focus, and risk attitude determine how banks respond to shifts in EPU. The diverse impacts of EPU on bank profit by category show that there is no one-size-fits-all approach to policy intervention in the banking industry.