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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