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The determinants of bank margins revisited: A note on the effects of diversification

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Most of the theoretical and empirical literature on bank margins has dealt solely with interest margins. Applying the seminal Ho-Saunders model (JFQA, 1981) to a multi-output framework, we show that the relationship between bank margins and market power (controlling for risk) varies significantly across bank specializations. Using a set of both accounting margins and New Empirical Industrial Organization (NEIO) margins, we find that market power rises significantly with output diversification towards non-traditional activities. These results contribute to explain the paradoxical coexistence of decreasing interest margins and higher market power found in previous studies.

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File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers05_11.pdf
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Paper provided by Department of Economic Theory and Economic History of the University of Granada. in its series ThE Papers with number 05/11.

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Length: 19 pages
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:gra:wpaper:05/11

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Keywords: bank margins; specialization; market structure.;

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  1. Nicola Cetorelli, 2001. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, American Finance Association, vol. 56(2), pages 617-648, 04.
  2. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-46, June.
  3. Santiago Carbo Valverdie & David Humphrey & Francisco Rodriguez Fernandez, 2003. "Deregulation, Bank Competition and Regional Growth," Regional Studies, Taylor & Francis Journals, vol. 37(3), pages 227-237.
  4. Rogers, Kevin & SinkeyJr., Joseph F., 1999. "An analysis of nontraditional activities at U.S. commercial banks," Review of Financial Economics, Elsevier, vol. 8(1), pages 25-39, June.
  5. Franklin Allen & Anthony M. Santomero, 1999. "What Do Financial Intermediaries Do?," Center for Financial Institutions Working Papers 99-30, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 13-29.
  7. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  9. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 579-607.
  10. Kit, Pong Wong, 1997. "On the determinants of bank interest margins under credit and interest rate risks," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 251-271, February.
  11. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
  12. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
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