On the determinants of interest margin in transition banking: the case of Serbia

Abstract

PurposeThe purpose of this paper is to study the link between, on one hand the interest margin of the bank, and the determinants of the interest margin on the other. The basic importance of bank interest margin or spread (BIS), arises from the fact that it presents an indicator of a bank's profitability as well as the cost of financial intermediation imposed on both its depositors and debtors.Design/methodology/approachTo test the relationship using multiple linear regressions with lagged variables (OLS – ordinary least squares). In addition using correlation analysis as well as bootstrapping model was necessary to overcome the issue of unknown statistical distribution of small data samples.FindingsThe quantitative study reveals proposed positive and significant correlation between bank interest margins and proxies of interest‐rate risk, negative correlation with risk averseness, positive but slightly lower correlation with credit risk variable, and finally, not so strong influence of foreign bank entry. Research limitations/implications –To be more reliable, models should include individual bank‐specific data for cross‐banks examination, an area worthy of further research.Social implicationsHaving implemented the methodology, the paper draws some policy recommendations. To make interest margin optimal, authorities should redesign existing system of deposit protection together with building institutional credit guarantees and thus enable relevant information to flow freely amongst participants, i.e. to establish official information sharing arrangements for bank industry.Originality/valueThis is the first econometric study of the bank interest spread determinants for the Serbian banking industry.