The impact of financial reforms on bank’s interest margins: a panel data analysis

Abstract

Purpose The purpose of this paper is investigate the impact of financial reforms, financial liberalization and banking regulation and supervision policies on net interest margins by using the BankScope database of 76 economies. Design/methodology/approach The micro-panel data of more than 1,300 banks of 76 developed and developing economies over the period 2001-2005 have been used to investigate the relationships of financial reform, financial liberalization, banking supervision and regulation with net interest margins by using dynamic two-step system of generalized method of moments. Findings The empirical results provided the evidence that financial reform have a negative and statistically significant impact on bank interest margins. Specifically, it is important to note that in a weakly regulated and supervised environment, financial liberalization has a negative and insignificant impact on net interest margins. The findings of this paper also explain that the huge entrance of banks, the removal of interest rate controls, strong banking regulation and supervision and effective liberalization policies have reduced net interest margins in sample countries. Originality/value The originality of this research into the existing literature is the inclusion of some recently introduced determinants such as index of financial liberalization (with range 0-3 meaning fully repressed to fully liberalize) and banking regulation and supervision, bank age and the share of foreign and government banks. This paper applies large micro-data to explore the relationship of financial reform, financial liberalization and banking regulation and supervision on net interest margins. This paper also tries to explore the relationship of different levels of liberalization and banking supervision with net interest margins in detail.