The Effects of Firm and Bank Balance Sheet Conditions to Net Interest Margins: Evidence from Loan-level Firm Survey Data

This paper uses the interpretation of the monetary transmission channel model in Japan under low interest rates to clarify the factors that determine the net interest margin (NIM). An analysis using Loan-level data from the Tohoku region from 2012 to 2015 shows that the Capital-to-Asset Ratio of a firm is an important factor in determining NIM. Even if we consider that firms and banks have suffered Nuclear Damage, Bad reputation Damage, and Supplier Damage due to the Great East Japan Earthquake as control variables, the channel through the agency cost of the borrower is effective. Even if we put the policy response of Rents and leases Subsidy, Interest or guarantee fee Subsidy, Interest reductions, and Group Subsidy into the estimation formula as a control variable, the channel through the agency cost of the borrower is effective. On the other hand, the existence of a channel through banks' agency costs, funding costs of capital and borrowing, and liquidity costs cannot be shown to be stable. In other words, financial institutions can earn high NIMs when they lend to firms that have relatively small net worth and depend on banks for funding. Financial institutions in Japan's Tohoku region that wish to profit from lending need to face the agency problem between borrower firms and lender banks.