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

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Author Info
Santiago Carbó Valverde () (Department of Economic Theory and Economic History, University of Granada)
Francisco Rodríguez Fernández () (Department of Economic Theory and Economic History, University of Granada)

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Abstract

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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Publisher Info
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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Related research
Keywords: bank margins; specialization; market structure.;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
D40 - Microeconomics - - Market Structure and Pricing - - - General

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  1. 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. [Downloadable!] (restricted)
  2. Nicola Cetorelli & Michele Gambera, 1999. "Banking market structure, financial dependence and growth: international evidence from industry data," Working Paper Series WP-99-8, Federal Reserve Bank of Chicago. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
  4. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(3), pages 579-607.
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  7. 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. [Downloadable!] (restricted)
  8. 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. [Downloadable!]
  9. Santiago Carbó Valverdie & David Humphrey & Francisco Rodríguez Fernández, 2003. "Deregulation, Bank Competition and Regional Growth," Regional Studies, Taylor and Francis Journals, vol. 37(3), pages 227-237, May. [Downloadable!] (restricted)
  10. 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. [Downloadable!]
  11. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier. [Downloadable!] (restricted)
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  12. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 271-294, February. [Downloadable!] (restricted)
    Other versions:
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