Ruhr Economic Papers

Ruhr Economic Papers #705

Improving the Forecasts of European Regional Banks’ Profitability with Machine Learning Algorithms

by Ulrich Haskamp

RGS, UDE, 07/2017, 14 S./p., 8 Euro, ISBN 978-3-86788-819-6 DOI: 10.4419/86788819

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Abstract

Regional banks as savings and cooperative banks are widespread in continental Europe. In the aftermath of the financial crisis, however, they had problems keeping their profitability which is an important quantitative indicator for the health of a bank and the banking sector overall. We use a large data set of bank-level balance sheet items and regional economic variables to forecast protability for about 2,000 regional banks. Machine learning algorithms are able to beat traditional estimators as ordinary least squares as well as autoregressive models in forecasting performance.

JEL-Classification: C53, C55, G21

Keywords: Profitability; regional banking; forecasting; machine learning

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