IDEAS home Printed from https://ideas.repec.org/p/gra/wpaper/05-11.html
   My bibliography  Save this paper

The determinants of bank margins revisited: A note on the effects of diversification

Author

Listed:

Abstract

Most of the theoretical and empirical literature on bank margins has dealt solely with interest margins. Applying the seminal Ho-Saunders model (JFQA, 1981) to a multi-output framework, we show that the relationship between bank margins and market power (controlling for risk) varies significantly across bank specializations. Using a set of both accounting margins and New Empirical Industrial Organization (NEIO) margins, we find that market power rises significantly with output diversification towards non-traditional activities. These results contribute to explain the paradoxical coexistence of decreasing interest margins and higher market power found in previous studies.

Suggested Citation

  • Santiago Carbó Valverde & Francisco Rodríguez Fernández, 2005. "The determinants of bank margins revisited: A note on the effects of diversification," ThE Papers 05/11, Department of Economic Theory and Economic History of the University of Granada..
    • Handle: RePEc:gra:wpaper:05/11
    as

    Download full text from publisher

    File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers05_11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 271-294, February.
    2. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," The Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 579-607.
    3. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009, Elsevier.
    4. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
    5. Nicola Cetorelli & Michele Gambera, 2001. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, American Finance Association, vol. 56(2), pages 617-648, April.
    6. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    7. James R. Barth & R. Dan Brumbaugh & James A. Wilcox, 2000. "Policy Watch: The Repeal of Glass-Steagall and the Advent of Broad Banking," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 191-204, Spring.
    8. Santiago Carbo Valverdie & David Humphrey & Francisco Rodriguez Fernandez, 2003. "Deregulation, Bank Competition and Regional Growth," Regional Studies, Taylor & Francis Journals, vol. 37(3), pages 227-237.
    9. Kit, Pong Wong, 1997. "On the determinants of bank interest margins under credit and interest rate risks," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 251-271, February.
    10. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
    11. Rogers, Kevin & SinkeyJr., Joseph F., 1999. "An analysis of nontraditional activities at U.S. commercial banks," Review of Financial Economics, Elsevier, vol. 8(1), pages 25-39, June.
    12. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057, Elsevier.
    13. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    14. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
    15. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    16. Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Dec), pages 13-29.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
    2. Maria-Eleni K. Agoraki & Georgios P. Kouretas, 2019. "The determinants of net interest margin during transition," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1005-1029, November.
    3. Mimouni, Karim & Smaoui, Houcem & Temimi, Akram & Al-Azzam, Moh'd, 2019. "The impact of Sukuk on the performance of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 42-54.
    4. Santiago Carbó Valverde & Francisco Rodríguez Fernández, 2004. "The finance-growth nexus: a regional perspective," Economic Working Papers at Centro de Estudios Andaluces E2004/44, Centro de Estudios Andaluces.
    5. Dimitrios P. Louzis & Angelos T. Vouldis, 2015. "Profitability in the Greek Banking System: a Dual Investigation of Net Interest and Non-Interest Income," Working Papers 191, Bank of Greece.
    6. Horváth, Roman & Podpiera, Anca, 2012. "Heterogeneity in bank pricing policies: The Czech evidence," Economic Systems, Elsevier, vol. 36(1), pages 87-108.
    7. Papavangjeli, Meri & Leka, Eralda, 2016. "Përcaktuesit mikro- dhe makroekonomikë të marzhit neto të interesave në sistemin bankar shqiptar (2002-2014) [Micro- and macroeconomic determinants of net interest margin in the Albanian banking sy," MPRA Paper 78604, University Library of Munich, Germany, revised Jun 2016.
    8. Nguyen, Thach V.H. & Nguyen, Thai Vu Hong, 2022. "How do banks price liquidity? The role of market power," Global Finance Journal, Elsevier, vol. 53(C).
    9. Roman Horváth, 2009. "The Determinants of the Interest Rate Margins of Czech Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(2), pages 128-136, June.
    10. Saona, Paolo, 2016. "Intra- and extra-bank determinants of Latin American Banks' profitability," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 197-214.
    11. Arnold, Ivo J.M. & van Ewijk, Saskia E., 2012. "The quest for growth: The impact of bank strategy on interest margins," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 18-27.
    12. Entrop, Oliver & Memmel, Christoph & Ruprecht, Benedikt & Wilkens, Marco, 2015. "Determinants of bank interest margins: Impact of maturity transformation," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 1-19.
    13. Nana Kwasi Karikari & Kwadwo Kwakye Gyan & Muhammad Ahad Hayat Khan & Baah Aye Kusi, 2023. "Institutional quality and social cost of intermediation in Africa: Does the level of financial market development matter?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1899-1910, April.
    14. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    15. Martins, António Miguel & Serra, Ana Paula & Stevenson, Simon, 2019. "Determinants of real estate bank profitability," Research in International Business and Finance, Elsevier, vol. 49(C), pages 282-300.
    16. 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.
    17. Nguena Christian Lambert & Tsafack Nanfosso Roger, 2014. "On the Sensitivity of Banking Activity Shocks: Evidence from the CEMAC Sub-region," Economics Bulletin, AccessEcon, vol. 34(1), pages 354-372.
    18. Pankaj Sinha & Sakshi Sharma, 2016. "Determinants of bank profits and its persistence in Indian Banks: a study in a dynamic panel data framework," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 7(1), pages 35-46, March.
    19. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    20. Christian-Lambert Lambert Nguena & Roger Tsafack-Nanfosso, 2014. "On the Sensitivity of Banking Activity to Macroeconomic Shocks: Evidence from CEMAC Sub-region [Sensibilité du Secteur Bancaire aux Chocs Macroéconomiques: Cas de la sous-région CEMAC]," Post-Print halshs-01097850, HAL.

    More about this item

    Keywords

    bank margins; specialization; market structure.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gra:wpaper:05/11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Angel Solano Garcia. (email available below). General contact details of provider: https://edirc.repec.org/data/dtugres.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.