Bank Interest Margins Research Articles

Pengaruh Rasio Kecukupan Modal, Likuiditas, Risiko Kredit dan Efisiensi Biaya Terhadap Profitabilitas Pada Bank Go Public

Abstract - This increase in economic growth does not necessarily increase the profitability of banks in Indonesia. There are three fundamental problems that have been unearthed by the Deposit Insurance Corporation (LPS) for banks, among others, the first decline in bank interest rates continuously causing bank interest margins to thin. Second, the regulatory burden requires banks to set aside capital for additional bank capital reserves and thirdly the potential increase in the risk of non-performing loans due to global economic uncertainty and the uneven recovery of the domestic economy. For this reason, this research was conducted to find out how much profitability of domestic banks listed on the Indonesia Stock Exchange in the period 2014-2018 and also the relationship between internal predictors which, according to the review study, had a significant effect on profitability. The population in this study were 43 banks listed on the Indonesia Stock Exchange in the 2014-2018 period while the sample was 10 banks listed on the IDX with the largest number of assets according to Bank Indonesia using the purposive sampling method. The results showed a significant CAR, LDR, NPL and BOPO significantly influence ROA. While partially LDR, NPL and BOPO have a significant effect on ROA while CAR has no significant effect. The magnitude of the effect of the predictor variable on profitability using the coefficient of determination obtained by 74.2% while the remaining 25.8% is influenced by other variables outside this research model.Keywords: Capital Adequacy Ratio (CAR), Liquidity Ratio (LDR), Credit Risk (NPL), Operational Cost Efficiency (BOPO). Profitability (ROA).

Can good governance lower bank intermediation costs?

ABSTRACT This paper argues that better governance practices can reduce the costs, risks and uncertainty of financial intermediation. Our sample covers 100 high-, middle- and low-income countries during 1996 to 2015. Using panel regressions accounting for endogeneity and cross-sectional dependance, we find that net interest margins of banks are lower if various governance indicators are better. Governance indicators range from comprehensive indices on the rule of law to more narrow indicators like ethics of private firms. The global financial crisis seems not to have had a strong impact except via credit risk. Finally, we estimate that potential annual savings from lower net interest margins could average almost 0,3 percent of GDP, had the governance indicators been at the top decile. These simulations lend credence to the intuition that better governance practices should reduce costs, risks and uncertainty.

Financial Sector Transparency and Net Interest Margins: Should the Private or Public Sector lead Financial Sector Transparency?

This study examines the effect of private and public sector led financial sector transparency on bank interest margins across eighty-six economies. Using a two-step dynamic system generalized method of moments, least square dummy variables, fixed effects and bootstrap quantile panel models between 2005 and 2016, the findings of the two-step GMM are reported as follows. First, results reveal that financial sector transparency whether led by private or public sector reduces interest margins. Second, while no statistical evidence was found on which of the two (private or public sector led transparency) is more effective in dealing with bank interest margins, public sector-led financial transparency is found to be more consistent in reducing bank interest margins across many more economies. Third, the study shows that the effect of financial sector transparency is visible at lower and middle levels of bank interest margins implying that economies with lower and moderately high bank interest margin level can benefit more from policies targeted at improving transparency in the financial sector. These findings imply that the sampled countries must enact policies and laws that deepen and expand financial sector transparency in order to potentially reduce bank interest margins for the good of banking market participants and society at large.

Net Interest Margin of Commercial Banks in Vietnam

Net Interest Margin of Commercial Banks in Vietnam

Firm-specific Variables and Net Interest Margin in Nepalese Banks

This paper examines the impact of firm-specific variables on net interest margin in Nepalese commercial banks for the period 2005/06-2018/19. Secondary source data were collected through NRB and data have been analyzed using descriptive and causal comparative research design. In this paper, net interest margin is used as dependent variable and bank-specific variables such as size of assets, deposit ratio, loan ratio, and capital ratio are considered as explanatory variables. The estimated correlation results of the paper reveal that equity capital, bank loans and deposits are positively related with net interest margin of Nepalese commercial banks. Moreover, the regression results of this paper indicate that equity capital, bank lending and deposits have significant impact on net interest margin of banks. Finally, this paper concludes that bank loans and deposit have strong explanatory power to explain net interest margin as profitability in Nepalese commercial banks. Policy makers are suggested to formulate sound bank policies and to adopt effective strategies to increase the size of bank deposits as well as bank lending to maximize the profitability (net interest margin) in Nepalese commercial banks.

The Effect of Financial Sector Reforms on Bank Net Interest Margins in Ghana

This paper examines the effect of financial sector reforms on net interest margin of Ghanaian banks during the period 1997-2006. Changes have taken place in Ghana as in other countries. However, net interest margins have not declined as much in Ghana as they have elsewhere due to the influence of the degree of risk aversion, high operating costs and uncompetitive nature of the market structure. Although banks have relied heavily on fee- and commission-based services as additional sources of income to lower margins, this paper argues that despite recent developments in the Ghanaian financial landscape, financial sector reforms have not yet succeeded in bringing about a major reduction in the operating costs of banks that would translate into substantially narrower margins. This is by far the major significant effect of relatively wide net interest margin in Ghana.

Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

This study empirically examines how the bank specific factors, macro-economic, and institutional variables impact interest margins in China’s banking sector. A panel data analysis of bank data for the period 1988–2015 was carried out. We found a significant association between credit quality, risk aversion, liquidity risk, and the proportion of corporate and industrial loans and the adjusted interest spread (AIS). GDP growth rate, inflation, and the proportion of national savings to the GDP were found to have significant association with the AIS. Furthermore, institutional variables were found to have a significant moderating effect on the AIS. We contribute to the literature by examining a unique context and a more accurate measure of bank interest margin not used in prior studies.

Impact of liquidity risk on the performances of Sri Lankan commercial banks

This study investigates the impact of liquidity risk on the performance of commercial banks in Sri Lanka by analysing secondary panel data of six systemically important banks in the Sri Lankan financial system from 2006 to 2016. The objective of this study is to identify the significant liquidity risk factors and the impact of them on both top line and bottom line performance indicators of commercial banks. Researchers find that liquidity gap and non-performing loan ratio are the significant proxies for liquidity risk. Multiple regression analysis reveals that liquidity risk negatively and significantly affects bottom lines Return on Average Assets (ROAA) and Return on Average Equity (ROAE), whilst positively affects the top line Net Interest Margin (NIM) of the commercial banks. The findings of this study suggest that expenses of the banks should be controlled with better liquidity management to enhance bottom line performances.

Cross-Border Lending, Government Capital Injection, and Bank Performance

In this paper, we develop a contingent claim model to examine the optimal bank interest margin, i.e., the spread between the domestic loan rate and the deposit market rate of an international bank in distress. The framework is used to evaluate the cross-border lending efficiency for a bank that participates in a government capital injection program, a government intervention used in response to the 2008 financial crisis. This paper suggests that government capital injection is an appropriate way to recapitalize the distressed bank, enhancing the bank interest margin and survival probability. Nevertheless, the government capital injection lacks efficiency when the bank’s cross-border lending is high. Stringent capital regulation, suggested to prevent future crises by literature, leads to superior lending efficiency when the government capital injection is low.

Profitability trends in the era of financialization: Notes on the U.S. economy

This article considers the evolution of financialization in the U.S. economy by examining the profitability and the volume of profits of the financial sector relative to general profitability and total profits in the economy. It is shown that financial profitability rose strongly from the early 1980s to the early 2000s. Similarly, the volume of financial profits reached extraordinary levels in the early 2000s. These phenomena occurred while interest rates and the net interest margin of banks were on a downward trend and, broadly speaking, reflect financial expropriation in the U.S. economy. The great crisis of 2007–2009 has acted as a threshold point beyond which both the profitability and the volume of profits of the financial sector have not recovered to previous levels. It is possible, but not certain, that a rebalancing of the productive and the financial sectors is under way in the financialized U.S. economy.

Net Interest Margins of Banks in India

Net interest margin (NIM) is the raison d’être of banking. It is an important measure of efficacy of the banking sector. At the system level, it is indicative of the cost of financial intermediation, health of the banking sector and its pricing power. In recent years, the Indian banking sector has experienced a major metamorphosis, with increasing competition and changing norms of liquidity, income recognition and capital. The end of regulatory forbearance and asset quality review (AQR) unearthed significant non-performing assets. This article traces the influence of various factors on the NIM, using bank-level data for 42 Indian banks over 25 quarters from March 2011 to March 2017. The study employs a dynamic panel generalised method of moments (GMM) framework to trace the impact of three distinct set of factors in setting banks’ NIMs: bank-level factors (like the share of low interest-bearing deposits held, the extent of gross non-performing assets [GNPAs], the capital-to-risk weighted assets ratio [CRAR], size of the loan book, operating costs and lending rates); system-level factors such as the monetary policy rate, credit growth and yields on government securities and macro-variables such as GDP growth and inflation. The results indicate that the main determinants of NIMs are banks’ CRAR levels, the proportion of current account and savings account deposits (CASA) to total deposits, operating costs and size of the loan book. Macro-factors like the growth of the economy and repo rate have a positive influence on the NIM. JEL Classification: C23, E43, G21

Forecasting the Net Interest Margin and Loan Loss Provision Ratio of Banks in Various Economic Scenarios: Evidence from Poland

The aim of stress-testing is to test the resilience of the banking sector to negative developments on the financial markets and in the real economy. One of the key issues in stress-testing is the translation of various scenarios into bank-level risk parameters and the determination of their impact on banks’ profitability or loss-bearing capacity. This paper has two objectives. The first is to identify key macroeconomic determinants of the loan loss provision ratio and net interest margin. The second is to show how satellite models can be applied in stress-testing exercises to determine the impact of macroeconomic outcomes on banks. We contribute to the empirical literature by defining macroeconomic determinants for credit risk on the basis of three different credit portfolios (consumer, mortgage, and corporate) for banks operating in Poland. Our estimation results suggest that economic growth, the labour market, and market interest rates have a significant influence on the net interest margin and loan loss provision ratio.

Political connections, government capital injection, and deposit insurance premium

PurposeThe purpose of this paper is to develop a capped barrier option framework to consider the politically preferential treatment for bank loans incentivized by government capital injections and calculate loan-risk sensitive insurance premiums.Design/methodology/approachThis paper takes a capped barrier option approach to the market valuation of the equity of the bank and the liability of the deposit insurer. The cap demonstrates the dynamics of a politically connected borrowing firm’s asset and highlights the truncated nature of loan payoffs. The barrier addresses that default can occur at any time before the maturity date. The bank participating in a government capital injection program is required to fund the politically connected firm that has preferential access to financing.FindingsPolitical connection as such makes the bank more prone to risk taking at a reduced interest margin, produces greater safety for the bank owing to government capital injections, and leads to increasing the fair deposit insurance premium. The positive effect of political connection on the deposit insurance premium, which ignores the cap and the barrier yields significant over-estimation.Originality/valueThe study on the politically connected borrowing firm shows that political connection is likely to affect the distressed bank’s performance, yielding the political-connection cost of a reduced bank interest margin and the political-connection benefit of a reduced bank equity risk, contributing the literature on political connection and bank bailout.

How does soft information about small business lending affect bank efficiency under capital regulation?

In this paper, we develop a capped call option model to evaluate the equity of a bank under capital regulation. A capped type of credit risk from the performance of relationship borrowing firms is explicitly considered, captured by a mechanism through borrower soft information that the bank produces and accumulates. We study the impact of soft information for small business lending on the optimal bank interest margin, i.e., the spread between the loan rate and the deposit rate of a bank. Our findings show that favorable soft information increases small business lending at a reduced loan rate (and thus at a reduced margin), and further lowers bank equity risk and enhances efficiency gains from soft information acquisition when borrower dependent on bank financing is heavy. Moreover, we account for the capital regulatory environment stringent to small business lending that increases bank equity risk and decreases soft information efficiency gain. Our results have important bank interest margin implications in terms of achieving efficiency gain and lower risk exposure, which might conflict with capital regulation aiming to promote financial stability.

Bank Performance in Europe and the US: A Divergence in Market-to-Book Ratios

Post 2008, the market-to-book ratios of European and US banks have diverged markedly. We use panel regressions to investigate the determinants of the M/B ratios of 112 European and US banks. We show that the underperformance of European banks is mainly driven by non-performing loans and by the negative impact of policy rates on bank interest margins. The higher US bank valuations are mainly driven by higher profitability and better cost efficiency. Our results for European banks stress the importance of timely NPL resolution and imply that low-for-long monetary policy may harm bank health.

Impact of Capital on Profitability of Banks: Evidence from Vietnamese Commercial Banks

This study aims to investigate the impact of capital on bank profitability with evidence from Vietnamese commercial banks. With a sample of 30 Vietnamese commercial banks, the findings show the positive relationship between capital and bank profitability during the period of 2012-2018. Accordingly, the influence of capital is more pronounce in the case of small-sized banks, whereas it exerts insignificant influence on the profitability of large-sized banks. Moreover, a high degree of capital increased the profitability of private-owned banks, the impact of capital is positive and significant for the net interest margin of state-owned banks only.

Dealing with High Bank Interest Margins in Tunisia: A Dynamic Panel Investigation

AbstractBy investigating factors influencing interest margins adjustment, this paper aims to provide some answers on how to improve the efficiency of the Tunisian banking system. Focusing on different theoretical views on the determinants of banks intermediation margins using a quite representative sample observed between 1999 and 2014, we estimate an augmented model using the system GMM estimator assuming the existence of adjustment costs. Estimations results and robustness checks show that reducing intermediation margins of Tunisian banks is fundamentally a matter of improving cost efficiency, scale economies and competitiveness. Considering the highly distressed economic and financial context in which Tunisian banks operate since 2011, we think that improving bank efficiency and credit access in Tunisia is closely related to the capacity of the government and the regulatory authority to enforce urgent strategic reforms in order to consolidate the banking system and to improve its competitiveness.

Optimal bank interest margin under capital regulation: bank as a liquidity provider

PurposeThis paper aims to develop a barrier cap option model, i.e. a cap option model where default can occur at any time before the maturity date, to evaluate the equity and the default risk of a bank. The model implies the bank as a liquidity provider that one institution carriers out both lending and deposit-taking functions under the same roof. This paper studies the impacts of demand deposits and capital regulation on the optimal bank interest margin, i.e. the spread between the loan rate and the deposit rate.Design/methodology/approachThis paper characterizes the bank’s equity value by a barrier cap option framework. In the model, default can occur at any time before the maturity and loan markets are imperfectly competitive.FindingsThis paper has two main results. First, increases in demand deposits reduce the bank’s interest margin and further increase the bank’s default risk. The negative effect on the optimal bank interest margin which ignores the barrier leads to significant overestimation; the positive effect on the default risk which ignores the barrier leads to underestimation. Second, the same pattern of capital regulation as previously applies. Capital regulation as such makes the bank more prone to loan risk-taking, thereby adversely affecting the stability of banking system.Originality/valueThis paper reintroduces the knock-out value and bank interest margin determination within a synergy banking function to the cap option model. The results confirm the need to model bank equity as a barrier cap option and demonstrate its usefulness in capital regulation.

An Empirical Analysis of Factors Affecting Bank Interest Margins: Evidence from the South East European Countries

This paper provides an empirical analysis of factors affecting Bank Interest Margins in eight countries of the South‑East European (SEE) region between 2000 and 2014. The purpose of this paper is to examine and investigate the main drivers of Bank Interest Rate Margins across selected countries throughout the SEE region. Also, the study explored the relationship between the dependent variable Interest Rate Spread (IRS – as a proxy variable for measuring variation in Bank Interest Rate Margins) and a set of selected banks’ specific variables in SEE by employing panel data estimation methodology. This research is based on aggregate data for the whole banking sector of each country. In line with some expectations, our findings confirm the importance of credit risk, bank concentration operative efficiency, and inflation expectations in determining Bank Interest Rate Margins. Interestingly, in contrast to the majority of recent empirical research, the study found an inverse relationship between the bank concentration variable and Bank Interest Rate Margins as well as between the operational efficiency variable and Bank Interest Rate Margins. Also, the study could not find statistically significant evidence that Bank Interest Rate Margins are determined by output growth, bank profitability (measured by ROA) or liquidity risk.

Is Net Interest Margin influenced by Firm's Capital Structure Pattern: A Study on Commercial Banks in Sri Lanka

Objectives of this study were to examine the capital structure pattern of Sri Lankan commercial banks and to investigate the influence of capital structure pattern on net interest margin of commercial banks in Sri Lanka. This study was conducted with 10 licensed commercial banks which were listed in Colombo Stock Exchange (CSE), Sri Lanka. Panel data analysis was used to carry out the empirical study and data were extracted from the annual reports of selected companies for the ten years period from 2007 to 2016. Capital structure patterns of licensed commercial banks were measured by total debt to total assets ratio, long term debt to total assets ratio, and short term debt to total assets ratio. Net Interest Margin (NIM) was measured by net interest income to average earnings assets ratio. NIM specifies the cost and efficiency of financial intermediation by banks. Size of the banks and growth in banks deposit were considered as control variables. Descriptive statistics, correlation, pooled, fixed effect and random effect models were used for the data analysis. According to the descriptive statistics, present study found that commercial banks had lower leveraged capital structure pattern in Sri Lanka. F test was performed to diagnose the time fixed effect in the fixed effect model and outcome of the test revealed that p value was less than 0.05. Therefore, null hypothesis was rejected and fixed effect model was most appropriate than pooled OLS. Further, Lagrange Multiplier test for random effect was performed. The result indicated that the p value was 0.000 and rejected the null hypothesis in favor of the alternative which implied that random effect model was more appropriate than pooled OLS. Therefore, Hausman Specification test was performed to find out whether fixed or random effect model is suitable to examine the relationship between capital structure and NIM. Fixed effect model was considered as the most suitable model to examine the relationship between capital structure and NIM in this study. As per the result of fixed effect model, total debt to total assets ratio and long term debt to total asset ratio were significantly negatively related to NIM. Short term debt to total assets ratio, and size were not significantly related NIM. Results of the study suggest that financial managers should try to finance from retained earnings rather than relying heavily on debt capital in their capital structure. Outcome of the study may useful to the practitioners, investors and decision makers in order to maximize their return from their investments.