Abstract
This paper analyses the determinants of net interest margin, focusing on the impact of interest rates and the slope of the yield curve, using a broad panel of data from 32 countries over the period 2008–2014, starting at the outbreak of the crisis. The results show that the expansionary monetary policy measures adopted by numerous central banks to combat the crisis have had a negative impact on net interest margins both via the reduction in interest rates and—less powerfully—the flattening of the yield curve. Given that the relationship between net interest income and interest rates/slope of the yield curve is concave, a potential normalisation of monetary policy would have highly beneficial effects on restoring margins.
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Note: The solid lines represent the median value of each variable. The shaded areas delimit the second and third quartile of the distribution.
Source: OECD, BankScope and authors’ calculations
Note: The graph shows the effect on net interest income of a variation of 25–75 percentile of the distribution in each of the explanatory variables. The bars that have a more subdued colour correspond to variables whose effect is not statistically significant. The variables are sorted from highest to lowest impact on net interest income.
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Notes
Austria, Australia, Belgium, Canada, Switzerland, Colombia, Czech Republic, Germany, Denmark, Spain, Finland, France, UK, Greece, Ireland, Iceland, Italy, Japan, Korea, Rep., Luxembourg, Latvia, Netherlands, Norway, New Zealand, Poland, Portugal, Russian Federation, Sweden, Slovenia, Slovak Republic, USA and South Africa. The reason that justifies the sample used is that they are the countries for which the OECD database provides information on interest rates in the short (money market) and long-term (government debt) interest rates.
However, the market concentration is used as an instrument in the econometric estimation. This variable is approximated by the Herfindahl index, defined as the sum of the squares of the market shares, using the total assets as a proxy of banking activity.
As there are no data in BankScope about employee numbers for the entire sample, we have used the ratio of staff costs to total assets as a proxy for the cost of labour.
The empirical application analyses the robustness of the results using total assets as an indicator of size.
The empirical application tests for the robustness of the results using both provisions for insolvencies to the volume of credit granted and loans to total assets as an indicator of credit risk.
This variable is constructed as the operating costs (excluding financial costs), expressed as a percentage of the sum of the net interest margin and other operating income.
The total net effect on financial margins was a drop of 6 bp in the Euro Area banks, 10 bp in the USA, 4 bp in the UK, 7 bp in Japan, and 17 bp in the other countries.
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Acknowledgements
Authors thank the anonymous referees for helpful comments and suggestions. They gratefully acknowledge financial support of the Spanish Ministry of Science and Innovation (research Project ECO2013-43959-R). Joaquín Maudos also acknowledges financial support of Generalitat Valenciana (research Project PROMETEOII/2014/046). Paula Cruz-García acknowledges financial support of Spanish Ministry of Education (FPU2014/00936).
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Cruz-García, P., Fernández de Guevara, J. & Maudos, J. Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope. Empir Econ 56, 341–365 (2019). https://doi.org/10.1007/s00181-017-1360-0
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DOI: https://doi.org/10.1007/s00181-017-1360-0