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

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Listed:
  • 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)

Abstract

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.

Suggested Citation

  • David Liebeg & Markus S. Schwaiger, 2009. "What Drives the Interest Rate Margin Decline in EU Banking – The Case of Small Local Banks," Credit and Capital Markets, Credit and Capital Markets, vol. 42(4), pages 509-538.
  • Handle: RePEc:kuk:journl:v:42:y:2009:i:4:p:509-538
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    Cited by:

    1. Arnold, Ivo J.M. & van Ewijk, Saskia E., 2012. "The quest for growth: The impact of bank strategy on interest margins," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 18-27.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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