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How bank business models drive interest margins: Evidence from U.S. bank-level data

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Author Info

  • Saskia van Ewijk
  • Ivo Arnold

Abstract

The two decades prior to the credit crisis witnessed a strategic shift from a traditional, relationships-oriented model (ROM) to a transactions-oriented model (TOM) of financial intermediation in developed countries. A concurrent trend has been a persistent decline in average bank interest margins. In the literature, these phenomena are often explained using a causality that runs from increased competition in traditional segments to lower margins to new activities. Using a comprehensive dataset with bank-level data on over 16,000 FDIC-insured U.S. commercial banks for a period ranging from 1992 to 2010, this paper qualifies this chain of causality. We find that a bank's business model, measured using a multi-dimensional proxy of relationship banking activity, exerts a robust, positive effect on interest margins. Relationship banks still enjoy considerable interest margins. Our results provide evidence that banks' quest for growth, not the level of competition in traditional retail segments, has transformed banks' balance sheets and has reduced interest rate margins as a by-product.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 387.

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Date of creation: Aug 2013
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Handle: RePEc:dnb:dnbwpp:387

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Keywords: interest margins; relationship banking; transaction banking; bank risk-taking;

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Cited by:
  1. Berger, Allen N. & Goulding, William & Rice, Tara, 2013. "Do Small Businesses Still Prefer Community Banks?," International Finance Discussion Papers 1096, Board of Governors of the Federal Reserve System (U.S.).
  2. Leonardo Gambacorta & Adrian Van Rixtel, 2013. "Structural bank regulation initiatives: approaches and implications," BIS Working Papers 412, Bank for International Settlements.

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