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Determinants of Bank Interest Margins in Central and Eastern Europe

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Banks’ interest margins are among the most important indicators of the cost of financial intermediation. This paper investigates the determinants of banks’ interest margins in Central and Eastern Europe (CEE). Given the run-up to EU entry and EU membership itself, dynamics in the banking sector in CEE have developed rather differently than in other emerging market economies. We document that, in contrast to the literature, foreign ownership has a positive effect on interest margins, whereas state ownership proves to be irrelevant. Banks’ pricing of loans and deposits, however, is risk-adjusted in CEE – we detect positive risk premia for both interest and credit risk. However, our data provide some evidence for moral hazard behavior. Moreover, the decreasing interest margins in the region during the first half of the current decade seem to be caused by a decrease in operating costs as well as an increase of efficiency levels and rapid financial deepening.

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  • David Liebeg & Markus Schwaiger, 2007. "Determinants of Bank Interest Margins in Central and Eastern Europe," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 14, pages 68-84.
    • Handle: RePEc:onb:oenbfs:y:2007:i:14:b:1
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    Cited by:

    1. Katharina Allinger & Julia Wörz, 2020. "The sensitivity of banks’ net interest margins to interest rate conditions in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/20, pages 51-70.
    2. Jugnu Ansari & Ashima Goyal, 2014. "Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 317-339, Emerald Group Publishing Limited.
    3. Konstantins Benkovskis & Olegs Tkacevs & Karlis Vilerts, 2021. "Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences," Discussion Papers 2021/02, Latvijas Banka.
    4. Andrey Gurov & Milena Nikolova & Elena Stoyanova, 2018. "Behavioral Economics In Banking: Behavioral Factors As Determinants Of The Interest Rate Spread," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(3), pages 72-82.

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    More about this item

    Keywords

    Interest margins; local banks; relationship banking.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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