IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v12y2019i3p121-d249615.html
   My bibliography  Save this article

Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

Author

Listed:
  • Li Xian Liu

    (College of Business, Law & Governance, James Cook University, Townsville 4811, Australia)

  • Milind Sathye

    (Faculty of Business, Government & Law, University of Canberra, Canberra 2601, Australia)

Abstract

This study empirically examines how the bank specific factors, macro-economic, and institutional variables impact interest margins in China’s banking sector. A panel data analysis of bank data for the period 1988–2015 was carried out. We found a significant association between credit quality, risk aversion, liquidity risk, and the proportion of corporate and industrial loans and the adjusted interest spread (AIS). GDP growth rate, inflation, and the proportion of national savings to the GDP were found to have significant association with the AIS. Furthermore, institutional variables were found to have a significant moderating effect on the AIS. We contribute to the literature by examining a unique context and a more accurate measure of bank interest margin not used in prior studies.

Suggested Citation

  • Li Xian Liu & Milind Sathye, 2019. "Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints," JRFM, MDPI, vol. 12(3), pages 1-21, July.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:121-:d:249615
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/12/3/121/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/12/3/121/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    2. Poghosyan, Tigran, 2013. "Financial intermediation costs in low income countries: The role of regulatory, institutional, and macroeconomic factors," Economic Systems, Elsevier, vol. 37(1), pages 92-110.
    3. Karim Ben Khediri & Hichem Ben-Khedhiri, 2009. "Determinants of Islamic bank profitability in the MENA region," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 2(3/4), pages 409-426.
    4. Lepetit, Laetitia & Nys, Emmanuelle & Rous, Philippe & Tarazi, Amine, 2008. "The expansion of services in European banking: Implications for loan pricing and interest margins," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2325-2335, November.
    5. Barry P. Bosworth, 2014. "Interest Rates and Economic Growth: Are They Related?," Working Papers, Center for Retirement Research at Boston College wp2014-8, Center for Retirement Research.
    6. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    7. Loren Brandt & Xiaodong Zhu, 2000. "Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 422-451, April.
    8. M. Hashem Pesaran & Qiankun Zhou, 2018. "Estimation of time-invariant effects in static panel data models," Econometric Reviews, Taylor & Francis Journals, vol. 37(10), pages 1137-1171, November.
    9. Elyas Elyasiani & Rasoul Rezvanian, 2002. "A comparative multiproduct cost study of foreign-owned and domestic-owned US banks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 271-284.
    10. Entrop, Oliver & Memmel, Christoph & Ruprecht, Benedikt & Wilkens, Marco, 2015. "Determinants of bank interest margins: Impact of maturity transformation," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 1-19.
    11. Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 19(3), pages 411-432, September.
    12. Christoph Memmel, 2014. "Banks' interest rate risk: the net interest income perspective versus the market value perspective," Quantitative Finance, Taylor & Francis Journals, vol. 14(6), pages 1059-1068, June.
    13. Kaiguo Zhou & Michael C. S. Wong, 2008. "The Determinants of Net Interest Margins of Commercial Banks in Mainland China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(5), pages 41-53, September.
    14. Claeys, Sophie & Vander Vennet, Rudi, 2008. "Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West," Economic Systems, Elsevier, vol. 32(2), pages 197-216, June.
    15. Hatice Ozer Balli & Bent Sørensen, 2013. "Interaction effects in econometrics," Empirical Economics, Springer, vol. 45(1), pages 583-603, August.
    16. Ashoka Mody & Maria Soledad Martinez Peria, 2004. "How foreign participation and market concentration impact bank spreads: evidence from Latin America," Proceedings, Federal Reserve Bank of Cleveland, pages 511-542.
    17. Jude S. Doliente, 2005. "Determinants of bank net interest margins in Southeast Asia," Post-Print hal-00828474, HAL.
    18. Dietrich, Andreas & Wanzenried, Gabrielle, 2011. "Determinants of bank profitability before and during the crisis: Evidence from Switzerland," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 307-327, July.
    19. 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.
    20. Fadzlan Sufian & Muzafar Shah Habibullah, 2009. "Determinants of bank profitability in a developing economy: Empirical evidence from Bangladesh," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 10(3), pages 207-217, April.
    21. R. Gaston Gelos, 2009. "Banking Spreads In Latin America," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 796-814, October.
    22. McShane, R. W. & Sharpe, I. G., 1985. "A time series/cross section analysis of the determinants of Australian trading bank loan/deposit interest margins: 1962-1981," Journal of Banking & Finance, Elsevier, vol. 9(1), pages 115-136, March.
    23. Grant Turner & Nicholas Tan & Dena Sadeghian, 2012. "The Chinese Banking System," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 53-64, September.
    24. Anthony Birchwood & Michael Brei & Dorian Noel, 2017. "Interest margins and bank regulation in Central America and the Caribbean," Post-Print hal-01589197, HAL.
    25. Yong Tan & Christos Floros, 2012. "Bank profitability and inflation: the case of China," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(6), pages 675-696, October.
    26. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    27. 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.
    28. Hawtrey, Kim & Liang, Hanyu, 2008. "Bank interest margins in OECD countries," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 249-260, December.
    29. 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(4), pages 581-600, November.
    30. Priscilla Liang, 2016. "Comparing Chinese and Indian Banks and their Socialist versus Capitalist Reforms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1310-1320.
    31. Juann H. Hung & Rong Qian, 2010. "Why Is China's Saving Rate So High? A Comparative Study of Cross-Country Panel Data: Working Paper 2010-07," Working Papers 21920, Congressional Budget Office.
    32. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li Xian Liu & Fuming Jiang & Milind Sathye & Hongbo Liu, 2021. "Are Foreign Banks Disadvantaged Vis-À-Vis Domestic Banks in China?," JRFM, MDPI, vol. 14(9), pages 1-36, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Raja Almarzoqi & Sami Ben Naceur, 2015. "Determinants of Bank Interest Margins in the Caucasus and Central Asia," IMF Working Papers 2015/087, International Monetary Fund.
    2. Nguyen Duy Suu & Thu-Quang Luu & Kim-Hung Pho & Michael McAleer, 2020. "Net Interest Marginof Commercial Banks in Vietnam," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(1), pages 1-27, March.
    3. Nguyen, Thach V.H. & Nguyen, Thai Vu Hong, 2022. "How do banks price liquidity? The role of market power," Global Finance Journal, Elsevier, vol. 53(C).
    4. Konstantins Benkovskis & Olegs Tkacevs & Karlis Vilerts, 2021. "Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences," Discussion Papers 2021/02, Latvijas Banka.
    5. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    6. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    7. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    8. Murad Khan & Abdul Jalil, 2020. "Determinants of Interest Margin in Pakistan: A Panel Data Analysis," Economies, MDPI, vol. 8(2), pages 1-14, March.
    9. Anthony Birchwood & Michael Brei & Dorian Noel, 2016. "Bank interest margins and regulation in Central America and the Caribbean," Working Papers hal-04141575, HAL.
    10. Pires Tiberto, Bruno & Oliveira de Moraes, Claudio & Pio Corrêa, Paloma, 2020. "Does transparency of central banks communication affect credit market? Empirical evidence for advanced and emerging markets," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    11. Md Mohiuddin Chowdhury & Changjun Zheng & Anupam Das Gupta & Atta Ullah, 2024. "Competition's Effect: Unveiling the Simultaneous Relationship between Risk and Cost of Financial Intermediation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(5), pages 1-4.
    12. Valente, José & Augusto, Mário & Murteira, José, 2024. "Differentiated impact of spread determinants by personal loan category: Evidence from the Brazilian banking sector," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 299-315.
    13. Saad Azmat & A. S. M. Sohel Azad & M. Ishaq Bhatti & Hamza Ghaffar, 2020. "Islamic Banking, Costly Religiosity, And Competition," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(2), pages 263-303, May.
    14. Dimitrios P. Louzis & Angelos T. Vouldis, 2015. "Profitability in the Greek Banking System: a Dual Investigation of Net Interest and Non-Interest Income," Working Papers 191, Bank of Greece.
    15. Bismark Addai & Wenjin Tang & Adjei Gyamfi Gyimah & Kingsley Opoku Appiah, 2023. "Bank intermediation margins in transition banking domains: panel evidence from Africa," Economic Change and Restructuring, Springer, vol. 56(4), pages 2129-2167, August.
    16. Trinugroho, Irwan & Agusman, Agusman & Tarazi, Amine, 2014. "Why have bank interest margins been so high in Indonesia since the 1997/1998 financial crisis?," Research in International Business and Finance, Elsevier, vol. 32(C), pages 139-158.
    17. López-Espinosa, Germán & Moreno, Antonio & Pérez de Gracia, Fernando, 2011. "Banks' Net Interest Margin in the 2000s: A Macro-Accounting international perspective," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1214-1233, October.
    18. Maudos, Joaquín & Solís, Liliana, 2009. "The determinants of net interest income in the Mexican banking system: An integrated model," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1920-1931, October.
    19. de Moraes, Claudio & Galvis-Ciro, Juan Camilo & Gargalhone, Micheli, 2021. "Financial access and interest rate spread: An international assessment," Journal of Economics and Business, Elsevier, vol. 114(C).
    20. Entrop, Oliver & Memmel, Christoph & Ruprecht, Benedikt & Wilkens, Marco, 2015. "Determinants of bank interest margins: Impact of maturity transformation," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 1-19.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:121-:d:249615. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.