Review of Quantitative Finance and Accounting

, Volume 53, Issue 4, pp 1005–1029 | Cite as

The determinants of net interest margin during transition

  • Maria-Eleni K. Agoraki
  • Georgios P. KouretasEmail author
Original Research


In this paper we examine the banking sector of the Central and Eastern European (CEE) countries during the transition period 1998–2016 in a number of critical dimensions. We place particular importance on the effect that the regulatory framework along with a group of bank-specific, industry-specific and macroeconomic factors have on the net interest margin (NIM) in the banking sectors of the Central and Eastern European countries over the period 1998–2016. In addition to the standard determinants employed in the literature, the present study provides a unique natural experiment to examine the effect of the extensive banking sector reform that took place during the examined period in the CEE countries. We employ both static and dynamic frameworks as well as advanced market structure measures and we argue that net interest margin is determined by bank-specific characteristics such as equity capital, risk and operational inefficiency. Furthermore, it is shown that the regulatory framework as well as the presence of foreign-owned institutions in the CEE countries play an important role in determining NIM. However, as financial systems develop and the reform process ends, both the current and future rates of economic growth are likely to have an enhanced impact on bank margins.


Net interest margin Central Eastern European banking Banking sector reform 

JEL Classification

G21 G32 G38 P34 P52 


  1. Abreu M, Mendes V (2003) Do macro-financial variables matter for European bank interest margins and profitability? Financial Management Association InternationalGoogle Scholar
  2. Agoraki MEK (2009) Developments in the European banking industry (corporate governance, performance, competition and reform). PhD thesis, Department of Accounting and Finance, Athens University of Economics and BusinessGoogle Scholar
  3. Agoraki MEK, Delis MD, Pasiouras F (2011) Regulations, competition and bank risk-taking in transition countries. J Financ Stab 7:38–48Google Scholar
  4. Altunbas Y, Gardener EPM, Molyneux P, Moore B (2001) Efficiency in European banking. Eur Econ Rev 45:1931–1955Google Scholar
  5. Angbazo L (1997) Commercial bank net interest margins, default risk, interest rate risk and off-balance sheet banking. J Bank Financ 21:55–87Google Scholar
  6. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297Google Scholar
  7. Arellano M, Bover O (1995) Another look at the instrumental variables estimation of error-components models. J Econom 68:29–51Google Scholar
  8. Athanasoglou P, Delis M, Staikouras C (2006) Determinants of bank profitability in the South Eastern European region. J Financ Decis Mak 2:1–17Google Scholar
  9. Barth J, Caprio G, Levine R (2001a) The regulation and supervision of bank around the world: a new database. In: Litan RE, Herring R (eds) Integrating emerging market countries into the global financial system (Brookings-Wharton papers in financial services). Brooking Institution Press, Washington, DC, pp 183–240Google Scholar
  10. Barth J, Caprio G, Levine R (2001b) Banking systems around the globe: Do regulations and ownership affect performance and stability? In: Mishkin FS (ed) Prudential supervision: what works and what doesn’t. University of Chicago Press, Chicago, pp 31–88Google Scholar
  11. Barth JR, Caprio G Jr, Levine R (2006) Rethinking bank regulation: till angels govern. Cambridge University Press, CambridgeGoogle Scholar
  12. Barth JR, Caprio G Jr, Levine R (2008) Bank regulations are changing: but for better or worse? World Bank policy research working paper 4646Google Scholar
  13. Berger AN (1995a) The relationship between capital and earnings in banking. J Money Credit Bank 27:432–456Google Scholar
  14. Berger AN (1995b) The profit-structure relationship in banking: tests of market-power and efficient-structure hypotheses. J Money Credit Bank 27:404–431Google Scholar
  15. Berger AN (2007) International comparisons of banking efficiency. Financ Mark Inst Instrum 16:119–144Google Scholar
  16. Berger AN, Mester LJ (1997) Inside the black box: what explains differences in the efficiencies of financial institutions? J Bank Financ 21:895–947Google Scholar
  17. Berger AN, Bonime SD, Covitz DM, Hancock D (2000) Why are bank profits so persistent? The roles of product market competition, informational opacity, and regional/macroeconomic shocks. J Bank Financ 24:1203–1235Google Scholar
  18. Bikker J, Metzemakers P (2005) Bank provisioning behaviour and procyclicality. J Financ Mark Inst Money 15:141–157Google Scholar
  19. Binder M, Hsiao C, Pesaran MH (2003) Estimation and Inference in short panel vector auto-regressions with unit roots and cointegration. Cambridge working paper in economics, no. 0003Google Scholar
  20. Blundell RW, Bond SR (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143Google Scholar
  21. Bonin J, Hassan I, Wachtel P (2005) Bank performance, efficiency and ownership in transition countries. J Bank Financ 29:31–53Google Scholar
  22. Brock P, Suarez LR (2000) Understanding the behavior of bank spreads in Latin America. J Dev Econ 63:113–134Google Scholar
  23. Carbo VS, Rodriguez FF (2007) The determinants of bank margins in European banking. J Bank Financ 31:2043–2063Google Scholar
  24. Cetorelli N, Gamberra M (2001) Banking market structure, financial dependence and growth: international evidence from industry data. J Financ 56:617–648Google Scholar
  25. Chen K-Y, Shen C-H, Kao L, Yeh C-Y (2018) Bank liquidity risk and performance. Rev Pac Basin Financ Mark Policies. CrossRefGoogle Scholar
  26. Cihak M, Demirgüç-Kunt A, Martinez Peria MS, Mohseni-Cheraghlou A (2012) Bank regulation and supervision around the world: a crisis update. World Bank policy research working paper 6286Google Scholar
  27. Claessens S, van Horen N (2014) Foreign banks: trends and impact. J Money Credit Bank 46:295–326Google Scholar
  28. Claessens S, Demirgüç-Kunt A, Huizinga H (2001) How does foreign entry affect domestic banking markets? J Bank Financ 25:891–911Google Scholar
  29. Claeys S, Vander Vennet R (2007) Determinants of bank interest margins in Central and Eastern Europe: a comparison with the West. Econ Syst 32:197–216Google Scholar
  30. Cottarelli C, Dell G, Vladkova-Hollar I (2005) Early birds, late risers, and sleeping beauties: bank credit growth to the private sector in Central and Eastern Europe and in the Balkans. J Bank Financ 29:83–104Google Scholar
  31. Delis MD, Kouretas GP (2011) Interest rates and bank risk-taking. J Bank Financ 35:840–855Google Scholar
  32. Demirgüç-Kunt A, Detragiache E (2002) Does deposit insurance increase banking system stability? An empirical investigation. J Monet Econ 49:1373–1406Google Scholar
  33. Demirgüç-Kunt A, Huizinga H (1999) Determinants of commercial bank interest margins and profitability: some international evidence. World Bank Econ Rev 13:379–408Google Scholar
  34. Demirgüç-Kunt A, Laeven L, Levine R (2004) Regulations, market structure, institutions and the cost of financial intermediation. J Money Credit Bank 36:593–622Google Scholar
  35. Desmetz H (1973) Industrial structure, market rivalry, and public policy. J Law Econ 16:1–10Google Scholar
  36. Dietrich A, Wanzenried G (2011) Determinants of bank profitability before and during the crisis: evidence from Switzerland. J Int Financ Mark Inst Money 21:307–327Google Scholar
  37. Drakos K (2002) The dealership model for interest margins: the case of the Greek banking industry. J Emerg Financ 1:75–98Google Scholar
  38. Drakos K (2003) Assessing the success of reform in transition banking 10 years later: an interest margins analysis. J Policy Model 25:309–317Google Scholar
  39. Drakos AA, Kouretas GP, Tsoumas Ch (2016) Ownership, interest rates and bank risk-taking in the Central and Eastern European countries. Int Rev Financ Anal 45:308–319Google Scholar
  40. European Bank for Reconstruction and Development (2004) Transition report: infrastructure EBRDGoogle Scholar
  41. European Central Bank (2005) EU banking structuresGoogle Scholar
  42. Furlong FT, Keeley MC (1989) Capital regulation and bank risk-taking: a note. J Bank Financ 13:883–891Google Scholar
  43. García-Herrero A, Gavilá S, Santabárbara D (2009) What explains the low profitability of Chinese banks? J Bank Financ 33:2080–2092Google Scholar
  44. Gorton G, Winton A (1998) Banking in transition economies: does efficiency require stability? J Money Credit Bank 30:621–650Google Scholar
  45. Ho T, Saunders A (1981) The determinants of bank interest margins: theory and empirical evidence. J Financ Quant Anal 16:581–600Google Scholar
  46. Keeley MC, Furlong FT (1990) A re-examination of the mean-variance analysis of bank capital regulation. J Bank Financ 14:69–84Google Scholar
  47. Kim D, Santomero AM (1988) Risk in banking and capital regulation. J Financ 43:1219–1233Google Scholar
  48. Koehn M, Santomero AM (1980) Regulation of bank capital and portfolio risk. J Financ 35:1235–1244Google Scholar
  49. Kouretas GP, Tsoumas Ch (2013) Bank risk-taking in Central and Eastern European countries. Cent Eur J Econ Model Econom 5:103–123Google Scholar
  50. Kouretas GP, Tsoumas Ch (2016) Foreign bank ownership and business regulations. J Financ Stab 24:104–116Google Scholar
  51. Laeven L, Levine R (2009) Bank governance, regulation and risk taking. J Financ Econ 93:259–275Google Scholar
  52. Lepetit L, Nys E, Rous P, Tarazi A (2008) The expansion of services in European banking: implications for loan pricing and interest margins. J Bank Financ 32:2325–2335Google Scholar
  53. Lian Y (2018) Bank competition and the cost of bank loans. Rev Quant Financ Account 51:253–282Google Scholar
  54. Majnoni G, Shankar R, Vàrhegyi E (2003) The dynamics of foreign bank ownership: evidence from hungary. World Bank policy research working paper 3114, Washington, DCGoogle Scholar
  55. Martinez Peria MS, Mody A (2004) How foreign participation and market concentration impact bank spreads: evidence from Latin America. J Money Credit Bank 36:511–537Google Scholar
  56. Martinez Peria M, Schmukler S (2001) Do depositors punish banks for bad behavior? Market discipline, deposit insurance and banking crises. J Finance 56:1029–1051Google Scholar
  57. Maudos J, Fernandez de Guevara J (2004) Factors explaining the interest margin in the banking sectors of the European Union. J Bank Financ 28:2259–2281Google Scholar
  58. Nys E (2003) A European study of bank interest margins: is net fees revenue a determinant? In: 20th Symposium, Birmingham research into international economics and financeGoogle Scholar
  59. Samuelson P (1945) The effect of interest rate increases on the banking system. Am Econ Rev 35:16–27Google Scholar
  60. Santos JAC (2001) Bank capital regulation in contemporary banking theory: a review of the literature. Financ Mark Inst Instrum 10:41–84Google Scholar
  61. Sapienza P (2002) What do state-owned firms maximize? Evidence from the Italian Banks, CEPR discussion paper no, p 3168Google Scholar
  62. Saunders A, Schumacher L (2000) The determinants of bank interest rate margins: an international study. J Int Money Financ 19:813–832Google Scholar
  63. Sologoub D (2006) The determinants of bank interest margins and profitability, case of Ukraine. Workshop on transition economics, Helsinki, April 7–8, 2006Google Scholar
  64. Stubos G, Tsikripis I (2007) Regional integration challenges in south east Europe: banking sector trends. Southeast Eur Black Sea Stud 7:57–81Google Scholar
  65. VanHoose D (2007) Theories of bank behaviour under capital regulation. J Bank Financ 31:3680–3697Google Scholar
  66. Ziaei SM (2017) Effects of financial soundness and openness of financial development. Rev Pac Basin Financ Mark Policies. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Maria-Eleni K. Agoraki
    • 1
  • Georgios P. Kouretas
    • 1
    • 2
    Email author
  1. 1.Department of Business AdministrationAthens University of Economics and BusinessAthensGreece
  2. 2.IPAG Business SchoolParisFrance

Personalised recommendations