The effects of SSM adoption on bank’s profitability : a long-term effects difference-in-difference analysis

This paper analyses the impact of the introduction of the Single Supervisory Mechanism on the profitability of banks. While this topic has not been extensively covered in the literature, it is worthy of attention as it allows to reflect on the impact of the SSM on directly supervised banks, namely focusing on its indirect effects. Indeed, its policies and measures are primarily oriented towards ensuring the resilience and soundness of the banking system, yet they might present potential spillover effects on banks’ profits. By using a difference-in-difference approach, we find a positive effect of the direct banking supervision by the ECB on banks profitability protracted over time. We use indeed a long-term effects difference-in-difference model which accounts for leads and lags, in order to analyze whether the treatment effect changes over time. Finally, we discuss the conclusions that the supervisor could draw from our empirical results, as well as how it interprets its role and looks at the performance of supervised entities.

This paper is part of the Banking Supervision Policy Working Paper Series in the context of the SSM-EUI partnership on SSM Banking Supervision Learning Services