Bank Margin Research Articles

Non-performing Assets (NPA) Dynamics in Emerging Markets: A Comparison Between India and China

Non-performing assets (NPAs) are a serious concern for banks, and they serve as a key measure of profit. Elevated levels of NPAs suggest a higher chance of credit bankruptcy, which harms banks' profitability and net worth while also reducing the value of their assets. This review provides a thorough investigation of NPAs in emerging countries, with a particular emphasis on a comparative analysis of regulatory methods in India and China. It seeks to clarify the significance of NPAs in emerging market economies by examining their role as indices of financial health, drivers of systemic concerns, and impediments to effective monetary policy. The study elucidates the performance of NPAs in banks in India and China. Additionally, the study identifies the economic, political, institutional, and social factors governing NPAs in these countries. Lastly, the study supports controlling NPAs rather than simply eliminating them, especially considering the higher inflation rates and bank margins found in these countries.

Understanding the heterogeneity of interest rate adjustments to monetary policy: Evidence for Colombia

A fundamental problem in macroeconomics is understanding how changes made by a country's central bank to its interest rate affect the rates that people and businesses actually experience. In this study, we used Colombian bank-level interest rate data from loans and deposits between 2010 and 2019 to assemble panel data of 35,000 observations to analyze how banks adjust their rates when the central bank changes its rate. We applied a model based on industrial organization theory to estimate each bank's strategic complementarity, a measure of the bank's market power. We found that banks tend to split their rate adjustments into one that directly responds to the central bank's changes and another that responds to how rival banks react. The rates offered by banks for deposits adjust less steeply than those applied to loans. These rates vary heterogeneously depending on the bank's characteristics, with large domestic banks showing the most significant strategic complementarity and small or foreign banks showing the least. Our results showed that bank margins (profits) increase by 0.2% for every 1% increase in the policy rate.

Impact of regulatory capital on bank interest margins: Moderating role of default risk

The recent pandemic and aftermath debate regarding bank interest margins deserve special attention and have become policy dialogue in emerging economies. However, the previous literature's findings were largely inconclusive and ignored influential variables such as the impact of default risk on bank interest margins. Using a two-step system GMM estimation considering 32 Bangladeshi commercial banks from 2000 to 2022, we produce robust evidence that higher regulatory capital restrictions reduce the bank interest margin, while increased default risk induces the bank interest margin. The impact intensity during the COVID pandemic is higher than in the pre-COVID period. Moreover, we find the synergy effect of regulatory capital and default risk assists in reducing the bank interest margin. Bank margin persistently fell during the capital market crash period, whereas it rose in the financial crisis period. We cast several robustness tests to confirm our main findings. These findings could generate important implications for bank stakeholders and policymakers.

The Impact of Capital Regulations on Bank Margins of ASEAN Banking Sector

Basel Committee on banking supervision (BCBS) has issued Basel which requires the banks to comply with the minimum capital requirement after the crisis. Nevertheless, whether the requirement imposes impact the banking sector which comprises a dual banking system, in a positive manner is still questionable. Given the higher capital costs from the strict capital requirements, banks are being forced to raise bank margins. This study investigates the effect of capital regulations on conventional and Islamic banks’ margins covering the ASEAN banking system from 2009 to 2017. The empirical analysis uses dynamic panel data frameworks to reveal several factors affecting bank margins. Overall, the results suggest that the total regulatory capital ratio helps reduce the margins of conventional banks but does not influence the margins of Islamic banks. As for the Tier-1 capital ratio, the variable increases the Islamic bank margins but does not significantly affect conventional bank margins. Based on the analysis results, regulators of conventional banks need to impose capital requirements as suggested by Basel III to reduce bank margins. Meanwhile, as for Islamic banks, the bank margins can be reduced if regulators can introduce a separate set of requirements tailored explicitly for Islamic banks.

What drove the rise in bank lending rates in Lithuania during the low-rate era?

ABSTRACT While Euro area interest rates were responding to accommodative monetary policy and decreasing throughout 2015-2019, in stark contrast, Lithuania's bank lending rates increased. Although the rates dropped slightly around the onset of the pandemic, they are still elevated and well above the EA figures. This paper asks the question: what were the drivers of such interest rate dynamics in Lithuania? By analysing the historical events and practical aspects of loan pricing in Lithuania's banking industry, we build an empirical model that exploits lending rate variation across banks, time and lending segments, and maps it to different drivers of pricing. We find that the recent changes in lending rates can be attributed to average bank margins, which moved largely in response to changes in market concentration.

Factors Affecting The Measurement of Intermediation Margin in Islamic Banks in Indonesia

Main Purpose - The purpose of this study is to empirically assess the main factors that affect the bank margin of Islamic operations in Indonesia.Method - Hypothesis testing and data analysis used the Structural Equation Model - Partial Least Square (SEM-PLS. The research sample was conducted on 10 Islamic banks that have a dual banking system in Indonesia.Main Findings - The results of the study proved that the Capital Adequacy Ratio (CAR) had a positive and significant effect on the Net Intermediation Margin (NIM) and the size of the bank had a positive and significant effect on the Net Intermediation Margin (NIM). Meanwhile, Non-Performing Financing (NPF) and Operating Expenses of Operating Income (BOPO) had no effect on the net intermediation margin (NIM) in Islamic Banks.Theory and Practical Implications - The significant impact of the CAR and the size of the bank showed that there was an analysis of capital policy and product diversification on the bank. The high level of margin in Islamic banks can be an obstacle for Islamic banks to pursue the development process, therefore, there is a need for improvement in terms of liability, asset side, and operational side of the Bank in order to reduce NIM in Sharia Banks. Novelty - This research used BI rate and inflation as control variables in contrast to other studies that included BI Rate and inflation as independent variables.

Does Interest Rate Liberalization Lead to The Narrowing of Commercial Banks’ Interest Margins?

Based on the background of China’s interest rate liberalization, this paper empirically investigates the impact of interest rate marketization on China’s commercial banks’ interest margins using a fixed effects model using panel data of 39 commercial banks in China for the last decade from 2013-2022. The results of the study indicate that interest rate liberalization significantly reduces the interest margins of Chinese commercial banks. In the long run, with the deepening of interest rate liberalization, the interest margins of commercial banks tend to narrow. At the end of the paper, suggestions are made in relation to the current situation of interest rate liberalization in China and the research results.

Islamic bank margins in Indonesia: The role of market power and bank-specific variables

Islamic bank margins in Indonesia: The role of market power and bank-specific variables

European bank margins at the zero lower bound

Post-2014, the zero lower bound on household deposits has intensified the downward pressure of the ECB’s accommodative monetary policy on banks’ net interest margins. Using a shadow rate to capture the stance of (unconventional) monetary policy, we construct counterfactual deposit rates, representing the path that deposit rates in 10 euro area countries would have followed in absence of the zero lower bound. Based on this counterfactual, we investigate whether banks attempt to compensate foregone deposit margins by increasing their lending margins. Our results show a substantial degree of margin compensation (around 44%). Moreover, banks which are highly dependent on net interest income increase their lending margins more, while higher shares of fee and commission income soften the compensation effect. Our estimations reveal important heterogeneity across euro area countries, with the end-2019 impact on lending margins ranging from negligible to more than 100 bps. These findings have implications for bank profitability, but also for the transmission of monetary policy to bank lending.

Bank profitability and economic growth in the emerging markets: The mediating role of stability

Bank profitability is of significant importance to economic growth since it determines banks’ resilience and their ability to provide credit (Raddatz et al., 2020). However, high bank profitability (margins) as in the Sub-Saharan Africa (SSA) region can hurt economic growth through inefficient financial intermediation (Rahman et al., 2023). It is, therefore, imperative to examine the interplay between bank profitability and economic growth in SSA. This study investigates the contribution of banks’ performance to economic growth in SSA by examining the impact of bank profitability on growth, as well as the mediating role of stability in this interplay. A panel dataset for 26 SSA economies that spans from 2000 to 2020 was collected and analyzed. System generalized method of moments (GMM) and structural equation model (SEM) were used for the analysis. Surprisingly, the study finds that bank profitability does not affect economic growth in SSA economies. This evidence is attributed to inefficient intermediation in the form of high bank margins and low lending volumes. However, a positive contribution of bank profitability to growth was noted in low-income economies, supporting the notion that banks dominate in economies with underdeveloped financial markets. The study also finds evidence of partial mediation of stability on the bank profitability-growth nexus in SSA.

Bioindicadores de calidad hídrica con diferente cobertura ribereña en la microcuenca Guapara, Ecuador

Agricultural activities produce changes in the margins of the stream banks, causing disturbances in water quality, and in the assemblage of aquatic insect communities. The objective of this research is to evaluate the changes in the structure and composition of the aquatic macroinvertebrate community, and physicochemical variables in relation to the land use of the Guapara river, Cotopaxi province, Ecuador. Samplings were conducted during the rainy season (December to February 2018-2019) in three streams with different riparian cover: agricultural, native forest, and forest plantations, where samples of aquatic insects and physicochemical parameters were collected in situ. A total of 461 aquatic insects corresponding to 7 orders and 25 families were collected. In general, the highest abundance in order and family was presented by Ephemeroptera with 34 %, and Leptophlebiidae with 21 % respectively. According to the Ephemeroptera, Plecoptera Trichoptera (EPT) index, the highest ecological condition was found in streams with native forest cover, and forest plantations respectively, and decreased in the stream with agricultural cover; while BMWP-Cr indicated water contamination in the three streams. Hydrobiosidae (Trichoptera) were associated with high turbidity values; while Gerridae (Hemiptera) were associated with high dissolved oxygen concentrations; in addition, Ptilodactylidae (Coleoptera) preferred the Q1-CA, and Q3-CF conditions, while Leptophlebiidae (Ephemeroptera) were associated with the stream of native forest. A negative influence of agricultural activity on the physicochemical parameters of the water and on the structure of the aquatic insect community assemblage was evidenced.

The Effect of Fintech Loans on Commercial Bank Margin

This study aims to examine how far competition between commercial banks and fintech firms impacts the margins of commercial banks in Indonesia. Panel data regression analysis using the random-effects model was conducted on the financial data of 84 commercial banks from 2018 to 2021. This study found that the growth of fintech firms did not affect decreasing commercial banks’ margins. However, fintech loans’ growth was found to significantly and negatively effecting commercial banks’ margins, Meaning that fintech loans’ growth decreases the margins of commercial banks in Indonesia. Bank size, non-performing loan (NPL), and capital ratios do not significantly affect commercial banks’ margins. This research ultimately provides input for making fintech interest rate policies and also input for commercial banks to adopt technology so that they do not seem old-fashioned and convoluted. This research only examines the influence of fintech firms on commercial banks, so future research could examine the effect on different types of banks, such as Islamic banks and rural banks.

The origin of carbonate mud and implications for global climate

Carbonate mud represents one of the most important geochemical archives for reconstructing ancient climatic, environmental, and evolutionary change from the rock record. Mud also represents a major sink in the global carbon cycle. Yet, there remains no consensus about how and where carbonate mud is formed. Here, we present stable isotope and trace-element data from carbonate constituents in the Bahamas, including ooids, corals, foraminifera, and algae. We use geochemical fingerprinting to demonstrate that carbonate mud cannot be sourced from the abrasion and mixture of any combination of these macroscopic grains. Instead, an inverse Bayesian mixing model requires the presence of an additional aragonite source. We posit that this source represents a direct seawater precipitate. We use geological and geochemical data to show that "whitings" are unlikely to be the dominant source of this precipitate and, instead, present a model for mud precipitation on the bank margins that can explain the geographical distribution, clumped-isotope thermometry, and stable isotope signature of carbonate mud. Next, we address the enigma of why mud and ooids are so abundant in the Bahamas, yet so rare in the rest of the world: Mediterranean outflow feeds the Bahamas with the most alkaline waters in the modern ocean (>99.7th-percentile). Such high alkalinity appears to be a prerequisite for the nonskeletal carbonate factory because, when Mediterranean outflow was reduced in the Miocene, Bahamian carbonate export ceased for 3-million-years. Finally, we show how shutting off and turning on the shallow carbonate factory can send ripples through the global climate system.

Late Pleistocene- Holocene architecture and sedimentary processes on the glacially influenced SW Grand Banks Slope off Newfoundland

Complex inter-relationships between alongslope and downslope sediment dispersion exist on glaciated continental margins and vary widely along continental margins depending on sediment supply and bottom current strength. In eastern Canada, proglacial sedimentation rates are relatively high on the SW Grand Banks Slope compared to the sediment starved SE Grand Banks margin, but relatively low compared to the glacially dominated Scotian margin off eastern Canada. As on other parts of the Canadian margin, its late Quaternary sediment architecture has been constructed by interacting alongslope and downslope processes. These include sediment transported by downslope glacial meltwater discharge, alongslope bottom currents and ice-rafting. Based on the analysis of sediment cores going back to 24 ka (Heinrich event 2), this study investigates fine-grained sedimentary facies and the development of variable depositional patterns on the glacially influenced SW Grand Banks Slope off Newfoundland (eastern Canada). Both turbidites and contourites show stratification, but differ in internal structure, the presence of IRD, and the nature of their upper and lower boundaries. Sandy contourites are mostly massive, occurring either as lenses or as part of the ideal bi-gradational vertical sequence with mottled silt-mud. Glacial silty contourites have distinct rhythmic laminae with the long axis of IRD parallel to bedding. Regional scale thickness variations allow discrimination between hemipelagites and muddy contourites. Depositional architecture is built through temporal and spatial coupling of the diverse sedimentary processes. During the last glacial maximum and early deglaciation, turbidity currents fed either by meltwater or oceanographic processes flowed in canyons, and a contourite depositional system developed between the canyons. The two systems interacted on inter-canyon ridges, where contourite sedimentation was not completely overwhelmed by energetic turbidity currents. In the Holocene, alongslope processes became dominant, building a drift with clearly variable thickness, in part related to seabed morphology. A conceptual model is proposed to present the key elements of depositional processes in this depositional system, and a similar evolutionary history can be expected on other distal glacial margins.

The Formation of Atolls: New Insights From Numerical Simulations

AbstractSeveral theories have been proposed to explain atoll formation. While karst dissolution during glacial periods and preferential coral reef accretion along raised bank margins during deglaciations and interglacials have been invoked to explain atoll formation, the respective roles of karst dissolution and reef margin construction in atoll formation have not been adequately evaluated by simulations. In this study, we conducted three‐dimensional numerical simulations of the Quaternary development of Meiji Atoll in the southern South China Sea based on interpreted data from a 2020‐m‐deep borehole drilled on its northeast rim in 2018. Our results suggest that the origin of atolls is more likely due to spatially differential dissolution across margin and interior areas (i.e., minimal along margins and maximal in bank centers) rather than preferential reef accretion along margins of flat‐topped banks. Preferential reef accretion along margins of flat‐topped banks that can result in central lagoons and atoll morphology can hardly result in the formation of lagoonal patch reefs that reach mean sea level. Preferential reef accretion along margins is mainly predicated on the karst‐induced morphology that has a central depression surrounded by raised rims, that is, using antecedent karst morphologies. If topographic highs in the lagoon are similar in elevation to the margins, reef accretion on these topographic highs can be similar to that observed on the margins, resulting in lagoonal patch reefs that reach mean sea level. Our simulation shows that spatially differential dissolution across margin and interior areas is a critical driver of worldwide central lagoons and atoll formation.

Impact of Liquidity Coverage Ratio on Performance of Select Indian Banks

The post-crisis liquidity framework improves banking stability by imposing stricter liquidity requirements. However, consistent bank performance continues to be an essential factor in achieving this goal. This study examines the impact of the liquidity coverage ratio (LCR) on the profitability and non-performing assets (NPAs) of Indian banks using annual data from 2010 to 2019. By applying the dynamic panel data regression technique, we found that compliance with the minimum level of the LCR reduces the net interest margins (NIMs) of banks due to a narrower interest spread, thereby impacting banks profitability. Moreover, the NPAs of the banks tend to grow with an increase in LCR. The study’s findings have far-reaching implications for policymakers. Indian policymakers/regulators need to understand the strategies used by banks to meet liquidity standards and, if necessary, revisit the policy framework to achieve better compliance results. The study’s framework establishes a foundation that can be used for conducting similar research in other complex geographies such as India.

How do banks price liquidity? The role of market power.

We empirically examine the effects of different measures of liquidity on interest margins of a sample of U.S. commercial banks from 2001 to 2018. Overall, the results reveal that liquidity ratios exert a positive influence on bank margins. Furthermore, the study investigates the role of market power in the relationship between liquidity and interest margins. It is documented that dominant banks incorporate the costs associated with investing in liquidity into the bank margins to a lesser extent than banks with less market power, suggesting that the cost of complying with regulatory liquidity standards is reduced when the competition in the banking sector is less intense. The study highlights that market competition might be important in the design and implementation of liquidity regulations.

The Impact of Indirect Competition on Bank Net Interest Margins: Microfinance Evidence from Pakistan

The study aims to investigate the impact of growth in microfinance initiatives on the net interest margins of commercial banks in Pakistan. Using data from the world bank MIX database and Thomson Reuters, we conducted a GLS random effect estimation on an unbalanced panel of Pakistani banks from 2010 to 2018. We find that credit quality, solvency, bank size, earning asset diversification, and market concentration impact banks' net interest margins. In addition, we find growth in development finance institutions to significantly affects commercial bank margins. Microfinance institutional growth is found to reduce net interest margins. Besides microfinance institutions, the growth of specialised microfinance banks is also found to impact the spread negatively. This indirect effect may be evidence of the improved efficiency derived from higher competition or the fact that microfinance institutions may be using conventional banks as a permanent source of funds to become financially sustainable. The role of microfinance growth is not considered in literature since microfinance institutions are very different from conventional banks regarding lending volume and size. This study contributes to the existing theoretical and empirical literature on net interest margins by showing a positive role of indirect competition on banks' net interest margins. Therefore, policymaking focusing on improving conditions that enhance competition to bring bank spreads closer to regional levels may be needed.

The Whale Point Formation: A stratigraphic record of high-frequency climate and sea-level fluctuations in the Bahamas during Marine Isotope Stage 5a (ca. 80 ka BP)

In this paper, we formally define a series of bioclastic eolianites and protosols exposed on high-energy bank margins throughout the Bahamas archipelago as the Whale Point Formation (WPF). The position of this new lithostratigraphic unit above and seaward of deposits dated to Marine Isotope Stage (MIS) 5e and below Holocene sediments constrains its age to the latest Pleistocene, more precisely to MIS 5a (ca. 88–74 ka BP). This age is further corroborated by amino-acid racemization data calibrated with UTh ages. Based on their sedimentological characteristics, the WPF eolianites are interpreted as landward-advancing dunes decoupled from their source beaches. Relying on the faunal content, the maximum elevation of relative sea level during MIS 5a can be roughly estimated at ca. 9 ± 2 m below the present stand. The WPF includes two phases of eolian deposition separated by an interval of negative sediment budget and pedogenesis. These different facies possibly reflect millennial-scale sea-level and climate instability during MIS 5a, the latter being likely related to shifts in the mean annual position of the intertropical convergence zone and associated rainfall belt.

The impact of credit risk and liquidity risk on bank margins during economic fluctuations: evidence from MENA countries with a dual banking system

ABSTRACT This study investigates the simultaneous impact of the major sources of bank default, namely credit risk and liquidity risk on price-cost margins during economic fluctuations in the MENA countries with a dual banking system. We use an annually balanced data set including 30 conventional banks and 14 Islamic banks from 9 countries covering the period 2004–2020. Our findings highlight the importance of the two risk factors on determining banks’ cost of intermediation. The most interesting result is that their effects on bank margins are sensitive to economic fluctuations. More specifically, both risk factors have more significant effect on price-cost margins during good economic times. One important implication of our findings is that the authorities and policymakers should pay more attention to liquidity and risks during booms.