Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

Li Xian Liu,Milind Sathye

doi:10.2139/ssrn.3221991

Abstract

The objective of this paper is to empirically determine the factors that impact bank interest margins in China. We use relevant banking data for the period 1998-2015. Importantly, we examine, how the composition of assets and liabilities impacts interest margins. To our knowledge this aspect has not been explored. We also consider the impact of institutional environment and market structure changes. We found that the market pricing mechanism in interest rate hasn’t taken off yet despite the long-term reform by the Chinese government. Borrowing and lending rate are twisted. Foreign banks incorporated in China and the institutional settings represented by them have yet to exert any positive affect interest rate margins in China.

Highlights

IntroductionWhat are the determinants of interest rate margin in Chinese banks?
What are the determinants of interest rate margin in Chinese banks? This is the question that we address in the present paper
Standard deviation, minimum and maximum characteristics of all variables under consideration based on different groups of banks and on average

Summary

Introduction

What are the determinants of interest rate margin in Chinese banks? Net interest margin (NIM) refers to the difference between the lending and deposit rates of banks (Birchwood et al 2017). A study of interest margins is important because banks are dominant players in any economy and in developing/emerging countries, as banks are the main suppliers of finance. Bank net interest margin is used as one of the prime indicators of competitiveness in the financial system (Murray Review 2014). Interest margins are regularly watched by the central banks across the world. Interest margins are important from the perspective of savings and investments as high interest margins can adversely impact these, in developing economies where capital markets are not fully developed (Ben Khediri and Ben-Khedhiri 2009)

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