Differences in interest margins reflect differences in bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors. Using bank data for 80 countries for 1988-95, Demirguc-Kunt and Huizinga show that differences in interest margins and bank profitability reflect various determinants: Bank characteristics. Macroeconomic conditions. Explicit and implicit bank taxes. Regulation of deposit insurance. General financial structure. Several underlying legal and institutional indicators. Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that: Banks in countries with a more competitive banking sector-where banking assets constitute a larger share of GDP-have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins. Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs. Differences in a bank's activity mix affect spread and profitability. Banks with relatively high noninterest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) on to their depositors and lenders. In developing countries foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true. Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs-more transactions and generally more extensive branch networks-and also more income from bank float. Bank income increases more with inflation than bank costs do. There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike. Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability. This paper - a product of the Development Research Group - is part of a larger effort in the group to study bank efficiency.

https://papers.ssrn.com/sol3/Delivery.cfm/546.pdf?abstractid=614949&rulid=18542&mirid=4

Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence

Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in the economy and for pointing out structural weaknesses in the banking sector that may justify government intervention. In the past, banking courses in most doctoral programs in economics, business, or finance focused either on management or monetary issues and their macroeconomic consequences; a microeconomic theory of banking did not exist because the Arrow-Debreu general equilibrium model of complete contingent markets (the standard reference at the time) was unable to explain the role of banks in the economy. This text provides students with a guide to the microeconomic theory of banking that has emerged since then, examining the main issues and offering the necessary tools for understanding how they have been modeled. This second edition covers the recent dramatic developments in academic research on the microeconomics of banking, with a focus on four important topics: the theory of two-sided markets and its implications for the payment card industry; "non-price competition" and its effect on the competition-stability tradeoff and the entry of new banks; the transmission of monetary policy and the effect on the functioning of the credit market of capital requirements for banks; and the theoretical foundations of banking regulation, which have been clarified, although recent developments in risk modeling have not yet led to a significant parallel development of economic modeling. Praise for the first edition:"The book is a major contribution to the literature on the theory of bankingand intermediation. It brings together and synthesizes a broad range ofmaterial in an accessible way. I recommend it to all serious scholars andstudents of the subject. The authors are to be congratulated on a superbachievement." -- Franklin Allen, Nippon Life Professor of Finance and Economics, WhartonSchool, University of Pennsylvania "This book provides the first comprehensive treatment of the microeconomicsof banking. It gives an impressive synthesis of an enormous body ofresearch developed over the last twenty years. It is clearly written and apleasure to read. What I found particularly useful is the great effort thatXavier Freixas and Jean-Charles Rochet have taken to systematicallyintegrate the theory of financial intermediation into classicalmicroeconomics and finance theory. This book is likely to become essentialreading for all graduate students in economics, business, and finance." -- Patrick Bolton, Barbara and David Zalaznick Professor of Business, Columbia University Graduate School of Business "The authors have provided an extremely thorough and up-to-date survey ofmicroeconomic theories of financial intermediation. This work manages to beboth rigorous and pleasant to read. Such a book was long overdue and shouldbe required reading for anybody interested in the economics of banking andfinance." -- Mathias Dewatripont, Professor of Economics, ECARES, Universit

Microeconomics of banking

Econometric policy evaluation: A critique

Using bank-level data for 80 countries in the year's 1988-95, this article shows that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators. A larger ratio of bank assets to gross domestic product and a lower market concentration ratio lead to lower margins and profits, controlling for differences in bank activity, leverage, and the macroeconomic environment. Foreign banks have higher margins and profits than domestic banks in developing countries, while the opposite holds in industrial countries. Also, there is evidence that the corporate tax burden is fully passed onto bank customers, while higher reserve requirements are not, especially in developing countries.

/pdf/determinants-of-commercial-bank-interest-margins-and-4wc4ey2dph.pdf

Determinants of commercial bank interest margins and profitability : some international evidence

Investor Psychology and Security Market Under- and Overreactions

This article examines the issue of cross-sectional correlation in event studies. When there is event-date clustering, we find that even relatively low cross-correlation among abnormal returns is serious in terms of over-rejecting the null hypothesis of zero average abnormal returns. We propose a new test statistic that modifies the t-statistic of Boehmer, Musumeci, and Poulsen (1991) to take into account cross-correlation and show that it performs well in competition with others, including the portfolio approach, which is less powerful than other alternatives under study. Also, our statistic is readily useable to test multiple-day cumulative abnormal returns.

Event Study Testing with Cross-sectional Correlation of Abnormal Returns

The Miles and Snow strategic typology is a useful tool for categorizing as well as understanding the types of strategies to be followed by organizations. The authors attempt to relate the usefulnes...

Marketing strategy implications of the miles and snow strategic typology

The quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. We propose a simple adjustment to Lerner indices to account for the possibility of forgone rents to test this hypothesis. For a large sample of U.S. commercial banks, we find that adjusted Lerner indices are significantly larger than conventional Lerner indices and trending upward over time. Instrumental variable regressions reject the quiet life hypothesis for cost inefficiencies. However, Lerner indices adjusted for profit inefficiencies reveal a quiet life among U.S. banks.

Enjoying the quiet life under deregulation? evidence from adjusted lerner indices for u.s. banks

Predicting large US commercial bank failures

This study examines long-run relationships and short-run dynamic causal linkages among the U.S., Japanese, and ten Asian emerging stock markets, with the particular attention to the 1997-1998 Asian financial crisis. Extending related empirical studies, comparative analyses of pre-crisis, crisis, and post-crisis periods are conducted to comprehensively evaluate how stock market integration is affected by financial crises. In general, the results for the case of Asia show that both long-run cointegration relationships and short-run causal linkages among these markets were strengthened during the crisis and that these markets have generally been more integrated after the crisis than before the crisis. Detailed country-by-country analyses are provided, which yield a variety of new results concerning the roles of individual countries in international stock market integration. An important implication of our findings is that the degree of integration among countries tends to change over time, especially around periods marked by financial crises.

James W. Kolari

Papers

Event Study Testing with Cross-sectional Correlation of Abnormal Returns

Marketing strategy implications of the miles and snow strategic typology

Enjoying the quiet life under deregulation? evidence from adjusted lerner indices for u.s. banks

Predicting large US commercial bank failures

Stock Market Integration and Financial Crises: The Case of Asia