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

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  • Maudos, Joaquin
  • Fernandez de Guevara, Juan

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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Bibliographic Info

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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Keywords: margins; competition;

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  1. J.A. Bikker & K. Haaf, 2000. "Competition, concentration and their relationship: an empirical analysis of the banking industry," Research Series Supervision (discontinued) 30, Netherlands Central Bank, Directorate Supervision.
  2. Sherrill Shaffer, 1990. "A test of competition in Canadian banking," Working Papers 90-18, Federal Reserve Bank of Philadelphia.
  3. Corvoisier, Sandrine & Gropp, Reint, 2001. "Bank Concentration and Retail Interest Rates," Working Paper Series 0072, European Central Bank.
  4. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
  5. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 1045-1066, June.
  6. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  7. Francisco Pérez García & Joaquín Maudos Villarroya, 2001. "Competencia Versus Poder De Monopolio En La Banca Española," Working Papers. Serie EC 2001-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Lerner, Eugene M., 1981. "Discussion: The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 601-602, November.
  9. Angelini, P. & Cetorelli, N., 2000. "Bank Competition and Regulatory Reform: The Case of the Italian Banking Industry," Papers 380, Banca Italia - Servizio di Studi.
  10. Beighley, H Prescott & McCall, Alan S, 1975. "Market Power and Structure and Commercial Bank Installment Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 7(4), pages 449-67, November.
  11. 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.
  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.
  13. 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.
  14. Ribon, S. & Yosha, O., 1999. "Financial Liberalization and Competition in Banking: an Empirical Investigation," Papers 23-99, Tel Aviv.
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  1. Competencia bancaria y estabilidad macroeconómica
    by Javier Andrés in Nada Es Gratis on 2012-04-03 07:00:54
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