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Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates

Author

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  • Petr Hanzlík

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)

  • Petr Teplý

    (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Winston Churchill Sq. 4, 130 67 Prague, Czech Republic)

Abstract

In this paper, we analyse a relationship between net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature when examining a large sample of annual data on 629 banks from EU member countries during the 2011-2016 period, which also covers the period of zero and negative rates. We test three hypotheses and come to the three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship of NIM with short-term interest rate observed in previous studies, which supports the suspected non-linearity in situation of zero lower bound of interest rates. Contrary to other researchers, we find a negative relationship between NIM and the yield curve slope.

Suggested Citation

  • Petr Hanzlík & Petr Teplý, 2019. "Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates," Working Papers IES 2019/2, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2019.
    • Handle: RePEc:fau:wpaper:wp2019_02
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/6018/lang/cs
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    Cited by:

    1. Christian Calmès & Raymond Théoret, 2023. "Bank performance before and after the subprime crisis: Evidence from pooled data on big US banks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(2), pages 472-516, June.

    More about this item

    Keywords

    banks; net interest margin; Herfindahl index; interest rates; profitability; system GMM;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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