No. 519 - A model of the profit and loss accounts for the Italian banking system

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by Luca Casolaro and Leonardo Gambacorta October 2004

This paper analyzes the linkages between banks’ profitability and the main real and financial indicators. The results, derived by means of a reduced-form model for the period 1984- 2002, highlight a strict relation between all income and cost components and the evolution of the economic cycle. Net interest income shows a high correlation with nominal GDP and the interest rate term structure; income from services and trading are also influenced by the trend and volatility of stock and financial markets. Operating expenses depend on wage dynamics and changes in a bank’s organizational structure. Simulations performed for the period 2001-02 show a good predictive power of the model

Published in 2005 in: Bancaria, v. 61, 3, pp. 19-27