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Bank management of the net interest margin: new measures

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  • Christoph Memmel
  • Andrea Schertler

Abstract

We decompose the change in banks’ net interest margin into a change in market-wide bank rates and a change in balance-sheet composition. The usefulness of this decomposition is illustrated for a detailed data set of German bank balance sheets, broken down into different maturities, creditors and borrowers, and degrees of liquidity. Our main findings are as follows. (1) Changes in market-wide bank rates have a much higher explanatory power for net interest margins than changes in balance-sheet composition. (2) On average, banks employ interest rate derivatives to hedge on-balance risk since changes in market-wide rates affect the net interest margin less strongly for derivatives users than for non-users. (3) When risk taking becomes more lucrative, derivatives users tend to increase their on-balance exposure more than do non-users. Copyright Swiss Society for Financial Market Research 2013

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  • Christoph Memmel & Andrea Schertler, 2013. "Bank management of the net interest margin: new measures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(3), pages 275-297, September.
    • Handle: RePEc:kap:fmktpm:v:27:y:2013:i:3:p:275-297
    DOI: 10.1007/s11408-013-0212-y
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    Cited by:

    1. Christoph Memmel, 2018. "Why Do Banks Bear Interest Rate Risk?," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 70(3), pages 231-253, July.
    2. Ramona Busch & Christoph Memmel, 2016. "Quantifying the components of the banks’ net interest margin," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 371-396, November.
    3. Mark Schaub & David R. Kaiser, 2020. "Mortgage, Treasury, CD and Fed Funds Rates Spreads and Risk Premiums: How do They Impact Net Interest Margins?," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 8(3), pages 125-132.
    4. Busch, Ramona & Drescher, Christian & Memmel, Christoph, 2017. "Bank stress testing under different balance sheet assumptions," Discussion Papers 07/2017, Deutsche Bundesbank.
    5. Mark Schaub & David R. Kaiser, 2020. "Mortgage, Treasury, CD and Fed Funds Rates Spreads and Risk Premiums: How do They Impact Net Interest Margins?," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 9(1), pages 29-36.
    6. Christoph Memmel & Atılım Seymen & Max Teichert, 2018. "Banks’ Interest Rate Risk and Search for Yield: A Theoretical Rationale and Some Empirical Evidence," German Economic Review, Verein für Socialpolitik, vol. 19(3), pages 330-350, August.

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    More about this item

    Keywords

    Net interest margin; Banking; Balance-sheet composition; G21;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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