North-South Divide in the European Banking Sector: Comparison between the Performance, Strength and Stability of Northern European Banks and Southern European Banks before and during the European Sove

Abstract: In the midst of the European sovereign debt crisis, the East-West divide of the continent became obsolete. The European Union now exhibits a new divide that is more economic than political - the North-South divide. Since the economies and the banking sectors of the Eurozone countries are very integrated, this paper explores whether there is a similar North-South divide in the European banking sector as well and whether the so-called North-South divide in the European banking sector grew wider with the European sovereign debt crisis. To answer this question, we run seven panel data regression analyses of northern European and southern European banks for the years 2005 to 2014. To run the regression analyses, we use seven financial ratios in four categories - capital, asset quality, profitability, and liquidity - as the dependent variables. Our expectations, formed by existing literature and general economic opinions are that North was doing better than South even before the crisis, and that all banks did more poorly after the onset of the European Sovereign Debt Crisis. Consequently, we put forward our hypothesis that this divide between how well banks are doing became wider during the crisis years. The results of our study are mostly in line with our expectations and, therefore, our hypothesis is proven: Northern banks emerged relatively stronger and more profitable than Southern banks after the crisis. However, a surprising discovery was that before the onset of the crisis, southern banks were actually the ones that seemed to do better, at least in regards to the financial ratios we are examining.