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Key Determinants of the Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates

Author

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  • Petr Hanzlik

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

  • Petr Teply

    (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Prague, Czech Republic)

Abstract

In this paper, we analyse a relationship between the net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature by examining a large sample of annual data on 629 banks from EU member countries for the 2011-2016 period, which also covers the period of zero and negative rates. When testing three research hypotheses, we draw three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship between NIM and short-term interest rates observed in previous studies, which supports the suspected nonlinearity in an interest rate zero lower bound situation. In contrast to other researchers, we find a negative relationship between the NIM of EU banks and the yield curve slope.

Suggested Citation

  • Petr Hanzlik & Petr Teply, 2019. "Key Determinants of the Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(5), pages 416-439, October.
    • Handle: RePEc:fau:fauart:v:69:y:2019:i:5:p:416-439
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    File URL: http://journal.fsv.cuni.cz/mag/article/show/id/1444
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    Cited by:

    1. Christian Calmès & Raymond Théoret, 2023. "Bank performance before and after the subprime crisis: Evidence from pooled data on big US banks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(2), pages 472-516, June.

    More about this item

    Keywords

    banks; net interest margin; Herfindahl index; low-interest rate environment; profitability; system GMM;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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