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The expansion of services in European banking: Implications for loan pricing and interest margins

  • Lepetit, Laetitia
  • Nys, Emmanuelle
  • Rous, Philippe
  • Tarazi, Amine

Our study of 602 European banks over 1996-2002 investigates how the banks' expansion into fee-based services has affected their interest margins and loan pricing. We find that higher income share from commissions and fees is associated with lower margins and loan spreads. The higher the commission and fee income share, moreover, the weaker the link between bank loan spreads and loan risk. The latter result is consistent with the conjecture that banks price (or misprice) loans to increase sales of other services. That loss leader (or cross selling) hypothesis has implications for bank regulation and competition with (non-bank) lenders.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 2325-2335

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:11:p:2325-2335
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Simon Kwan, 1998. "Securities activities by commercial banking firms' Section 20 subsidiaries: risk, return and diversification benefits," Working Papers in Applied Economic Theory 98-10, Federal Reserve Bank of San Francisco.
  2. Maudos, Joaquin & Fernandez de Guevara, Juan, 2003. "Factors Explaining the Interest Margin in the Banking Sectors of the European Union," MPRA Paper 15252, University Library of Munich, Germany.
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  12. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
  13. 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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