IDEAS home Printed from https://ideas.repec.org/a/kap/fmktpm/v27y2013i3p275-297.html
   My bibliography  Save this article

Bank management of the net interest margin: new measures

Author

Listed:
  • Christoph Memmel
  • Andrea Schertler

Abstract

We decompose the change in banks’ net interest margin into a change in market-wide bank rates and a change in balance-sheet composition. The usefulness of this decomposition is illustrated for a detailed data set of German bank balance sheets, broken down into different maturities, creditors and borrowers, and degrees of liquidity. Our main findings are as follows. (1) Changes in market-wide bank rates have a much higher explanatory power for net interest margins than changes in balance-sheet composition. (2) On average, banks employ interest rate derivatives to hedge on-balance risk since changes in market-wide rates affect the net interest margin less strongly for derivatives users than for non-users. (3) When risk taking becomes more lucrative, derivatives users tend to increase their on-balance exposure more than do non-users. Copyright Swiss Society for Financial Market Research 2013

Suggested Citation

  • Christoph Memmel & Andrea Schertler, 2013. "Bank management of the net interest margin: new measures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(3), pages 275-297, September.
    • Handle: RePEc:kap:fmktpm:v:27:y:2013:i:3:p:275-297
    DOI: 10.1007/s11408-013-0212-y
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11408-013-0212-y
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11408-013-0212-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(2), pages 127-140, June.
    2. Memmel, Christoph, 2011. "Banks' exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 282-289, February.
    3. Dawood Ashraf & Yener Altunbas & John Goddard, 2007. "Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 483-500.
    4. Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1769-1808, September.
    5. Delis, Manthos D. & Kouretas, Georgios P., 2011. "Interest rates and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 840-855, April.
    6. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    7. 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.
    8. Elijah Brewer & William E. Jackson & James T. Moser, 2001. "The value of using interest rate derivatives to manage risk of U.S. banking organizations," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q III), pages 49-66.
    9. Kasman, Adnan & Tunc, Gokce & Vardar, Gulin & Okan, Berna, 2010. "Consolidation and commercial bank net interest margins: Evidence from the old and new European Union members and candidate countries," Economic Modelling, Elsevier, vol. 27(3), pages 648-655, May.
    10. Christoph Memmel, 2008. "Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 85-104.
    11. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    12. Christoph Memmel & Andrea Schertler, 2012. "The Dependency of the Banks' Assets and Liabilities: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 18(4), pages 602-619, September.
    13. Brewer III, Elijah & Minton, Bernadette A. & Moser, James T., 2000. "Interest-rate derivatives and bank lending," Journal of Banking & Finance, Elsevier, vol. 24(3), pages 353-379, March.
    14. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 391-405, December.
    15. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    16. David Carter & Joseph Sinkey, 1998. "The Use of Interest Rate Derivatives by End-users: The Case of Large Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 17-34, July.
    17. DeYoung, Robert & Yom, Chiwon, 2008. "On the independence of assets and liabilities: Evidence from U.S. commercial banks, 1990-2005," Journal of Financial Stability, Elsevier, vol. 4(3), pages 275-303, September.
    18. 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.
    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. Christoph Memmel, 2018. "Why Do Banks Bear Interest Rate Risk?," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 70(3), pages 231-253, July.
    2. Busch, Ramona & Drescher, Christian & Memmel, Christoph, 2017. "Bank stress testing under different balance sheet assumptions," Discussion Papers 07/2017, Deutsche Bundesbank.
    3. Mark Schaub & David R. Kaiser, 2020. "Mortgage, Treasury, CD and Fed Funds Rates Spreads and Risk Premiums: How do They Impact Net Interest Margins?," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 9(1), pages 29-36.
    4. Memmel Christoph & Seymen Atılım & Teichert Max, 2018. "Banks’ Interest Rate Risk and Search for Yield: A Theoretical Rationale and Some Empirical Evidence," German Economic Review, De Gruyter, vol. 19(3), pages 330-350, August.
    5. Ramona Busch & Christoph Memmel, 2016. "Quantifying the components of the banks’ net interest margin," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 371-396, November.
    6. Mark Schaub & David R. Kaiser, 2020. "Mortgage, Treasury, CD and Fed Funds Rates Spreads and Risk Premiums: How do They Impact Net Interest Margins?," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 8(3), pages 125-132.

    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. Memmel, Christoph & Schertler, Andrea, 2011. "Banks' management of the net interest margin: Evidence from Germany," Discussion Paper Series 2: Banking and Financial Studies 2011,13, Deutsche Bundesbank.
    2. Kristine Watson Hankins, 2011. "How Do Financial Firms Manage Risk? Unraveling the Interaction of Financial and Operational Hedging," Management Science, INFORMS, vol. 57(12), pages 2197-2212, December.
    3. Esposito, Lucia & Nobili, Andrea & Ropele, Tiziano, 2015. "The management of interest rate risk during the crisis: Evidence from Italian banks," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 486-504.
    4. Hao, Xiangchao & Sun, Qinru & Xie, Fang, 2022. "International evidence for the substitution effect of FX derivatives usage on bank capital buffer," Research in International Business and Finance, Elsevier, vol. 62(C).
    5. Christoph Memmel, 2020. "What drives the short‐term fluctuations of banks' exposure to interest rate risk?," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 674-686, October.
    6. Deng, Saiying & Elyasiani, Elyas & Mao, Connie X., 2013. "BHC Derivatives Usage, Cost of Debt and Lending Patterns," Working Papers 13-23, University of Pennsylvania, Wharton School, Weiss Center.
    7. 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.
    8. Dionne, Georges & Triki, Thouraya, 2005. "Risk management and corporate governance: The importance of independence and financial knowledge for the board and the audit committee," Working Papers 05-3, HEC Montreal, Canada Research Chair in Risk Management.
    9. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    10. Memmel, Christoph, 2011. "Banks' exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 282-289, February.
    11. Lannoo, Karel & Thomadakis, Apostolos, 2020. "Derivatives in Sustainable Finance," ECMI Papers 29791, Centre for European Policy Studies.
    12. Deng, Saiying & Elyasiani, Elyas & Mao, Connie X., 2017. "Derivatives-hedging, risk allocation and the cost of debt: Evidence from bank holding companies," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 114-127.
    13. Wong, Kit Pong, 2014. "Fixed versus variable rate loans under regret aversion," Economic Modelling, Elsevier, vol. 42(C), pages 140-145.
    14. Ruprecht, Benedikt & Entrop, Oliver & Kick, Thomas & Wilkens, Marco, 2013. "Market timing, maturity mismatch, and risk management: Evidence from the banking industry," Discussion Papers 56/2013, Deutsche Bundesbank.
    15. Nevi Danila & Chia-Hsing Huang, 2016. "The determinants of exchange rate risk management in developing countries: evidence from Indonesia," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 6(1), pages 53-67.
    16. Downing, Jeff, 2019. "Accounting standards and banking regulation: Some effects of divergence," Research in International Business and Finance, Elsevier, vol. 47(C), pages 386-397.
    17. J. David Cummins & Richard D. Phillips & Stephen D. Smith, 1997. "Derivatives and corporate risk management: participation and volume decisions in the insurance industry," FRB Atlanta Working Paper 97-12, Federal Reserve Bank of Atlanta.
    18. Meng, Rujing & Wong, Kit Pong, 2010. "Multinationals and futures hedging: An optimal stopping approach," Global Finance Journal, Elsevier, vol. 21(1), pages 13-25.
    19. Fang Zhao & James Moser, 2017. "Bank Lending and Interest- Rate Derivatives," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(4), pages 23-37, October.
    20. Spagnolo, Giancarlo, 1996. "Multimarket Contact, Concavity, and Collusion: on Extremal Equilibria of Interdependent Supergames," SSE/EFI Working Paper Series in Economics and Finance 104, Stockholm School of Economics, revised 30 Nov 1998.

    More about this item

    Keywords

    Net interest margin; Banking; Balance-sheet composition; G21;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    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:kap:fmktpm:v:27:y:2013:i:3:p:275-297. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.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.