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Factors Explaining the Interest Margin in the Banking Sectors of the European Union

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Author Info
Maudos, Joaquin
Fernandez de Guevara, Juan

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Abstract

This study analyses the interest margin in the principal European banking sectors (Germany, France, the United Kingdom, Italy and Spain) in the period 1993-2000 using a panel of 15,888 observations, identifying the fundamental elements affecting this margin. Our starting point is the methodology developed in the original study by Ho and Saunders (1981) and later extensions, but widened to take banks’ operating costs explicitly into account. Also, unlike the usual practice in the literature, a direct measure of the degree of competition (Lerner index) in the different markets is used. The results show that the fall of margins in the European banking system is compatible with a relaxation of the competitive conditions (increase in market power and concentration), as this effect has been counteracted by a reduction of interest rate risk, credit risk, and operating costs.

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File URL: http://mpra.ub.uni-muenchen.de/15252/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15252.

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Date of creation: Sep 2003
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Handle: RePEc:pra:mprapa:15252

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Related research
Keywords: margins; competition;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 231-235, June. [Downloadable!]
  2. 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)
  3. Ribon, S. & Yosha, O., 1999. "Financial Liberalization and Competition in Banking: an Empirical Investigation," Papers 23-99, Tel Aviv.
  4. Nicola Cetorelli & Paolo Angelini, 1999. "Bank competition and regulatory reform: the case of the Italian banking industry," Working Paper Series WP-99-32, Federal Reserve Bank of Chicago. [Downloadable!]
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  5. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November. [Downloadable!] (restricted)
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