The Determinants of Bank Interest Margins: Estimates of a Dynamic Model
We develop a monopolistic version of a dynamic model of banking, where financial intermediation and payment services play a relevant role. We then empirically test the model using balance-sheet data for large European and US banks, and find strong support for the main predictions of the model. Interest revenues and costs are in fact very persistent, and they are strongly influenced by revenues from fees, and industrial and default costs. Interest margins rise with both short and long-term interest rates; however, when splitting the sample, we find that the results for the impact of interest rates are driven by the European banks. Finally, we find evidence that interest margins are anti-cyclical.
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