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What Drives the Interest Rate Margin Decline in EU Banking – The Case of Small Local Banks

Listed author(s):
  • David Liebeg

    (Oesterreichische Nationalbank, Abteilung für Finanzmarktanalyse, Otto-Wagner-Platz 3, A-1090 Wien/Österreich)

  • Markus S. Schwaiger

    (Oesterreichische Nationalbank, Abteilung für Finanzmarktanalyse, Otto-Wagner-Platz 3, A-1090 Wien/Österreich)

Registered author(s):

    Bank interest rate margins have been declining in most EU countries over the last decade. This paper investigates the determinants of bank interest rate margins drawing on a unique sample of small local banks in Austria. The reduction of small local banks interest rate margins is mainly driven by a combination of decreasing operating costs, enabling banks to charge lower margins, and increasing competition. In addition, there seems to be a tradeoff between small local banks margins and non-interest revenues. In contrast to findings in the literature we furthermore document a small, but significantly positive effect of relationship banking on interest rate margins.

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    Article provided by Credit and Capital Markets in its journal Kredit und Kapital.

    Volume (Year): 42 (2009)
    Issue (Month): 4 ()
    Pages: 509-538

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    Handle: RePEc:kuk:journl:v:42:y:2009:i:4:p:509-538
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