Abstract

The costs of financial intermediation have important consequences for financial development. Using bank-level data for 160 countries during 2005-14, this paper analyzes the composition and sources of bank net interest margins. First, it uses an accounting decomposition framework to provide summary statistics on the size of net interest margins and highlight the cost and profit components in countries, regions, and income groups. Second, it uses regression analysis to examine the underlying bank-level, structural, macroeconomic, and institutional determinants of net interest margins. Finally, the paper uses the results of the econometric analysis to construct country-level bar charts of relative contributing factors to financial intermediation costs. The results provide evidence-based guidance on key areas of structural reforms to reduce the costs of financial intermediation.

Highlights

  • Bank financial intermediation, that is, channeling funds from units in surplus to units in deficit, plays a critical role in sustainable and inclusive growth

  • The results show that banks with larger operations charge a higher margin, suggesting that any potential benefit arising from economies of scale is offset by higher risk, since for a given value of credit and market risk larger operations are expected to translate into a higher potential loss, for which banks demand a risk premium

  • We use the results of our econometric analysis to illustrate the relative contribution of each variable, so as to provide guidance on key areas of structural reforms to reduce the costs of financial intermediation

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Summary

Introduction

That is, channeling funds from units in surplus to units in deficit, plays a critical role in sustainable and inclusive growth. Using bank-level panel data on more than 14,000 commercial banks in 160 countries for the period 2005-2014, and controlling for country-level structural, macroeconomic and institutional data, this paper provides an empirical analysis of the determinants of intermediation spreads in all countries in the world for which data are available, representing to the best of our knowledge the most comprehensive attempt to study net interest margin determinants in a large sample of countries since the seminal contribution by Demirgüç-Kunt and Huizinga (1999). Our main concern is not to uncover new findings about the drivers of intermediation spreads but rather to provide an easy-to-interpret tool to highlight the most important factors by country To this end, empirical results are used to decompose the difference between each country’s net interest margins and those of the average banking system in the world as well as of the average banking system of the regional grouping to which the country belongs.

Methodology and data
Accounting decomposition of intermediation spreads
Regional groups exclude OECD high-income economies
Econometric estimates of intermediation spreads
Bar-charts of relative contributing factors of financial intermediation costs
Conclusions
Largest
Findings
1.50 Zambia
Full Text
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