Institutional and Other Determinants of the Net Interest Margin of US and European Banks in a Low Interest Rate Environment

In this paper, we analyze the relationship between the net interest margin (NIM) of US and European 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 1,155 banks from United States and EU member countries during the 2011-2016 period, which also covers periods of zero and negative rates in many of the observed countries. We test three hypotheses and come to three main conclusions. First, NIM is significantly influenced by the different institutional designs of bank-based or capital-based financial markets. Second, there are differences in NIM caused by bank size, although these are not fully captured by our methodology. Finally, we show significant differences by bank type: savings banks, real estate and mortgage banks, and cooperative banks report consistently lower NIMs than commercial banks and bank holdings. Contrary to other researchers, we observe a negative relationship between NIM and the yield curve slope.