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Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance

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  • Zarruk, Emilio R.
  • Madura, Jeff

Abstract

This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the bank's interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.

Suggested Citation

  • Zarruk, Emilio R. & Madura, Jeff, 1992. "Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 143-149, March.
  • Handle: RePEc:cup:jfinqa:v:27:y:1992:i:01:p:143-149_00
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