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The Determinants of Bank Interest Margins: Theory and Empirical Evidence

Published online by Cambridge University Press:  06 April 2009

Thomas S. Y. Ho  and
Anthony Saunders
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Extract

This paper has developed a model of bank margins or spreads in which the bank is viewed as a risk-averse dealer. It was demonstrated that an interest spread or margin would always exist, and that this was the result of transactions uncertainty faced by the bank. Moreover, it was shown that this pure spread depended on four factors: the degree of managerial risk aversion; the size of transactions undertaken by the bank; bank market structure; and the variance of interest rates. The model implied that liability and asset structures had to be analyzed together since they were directly interrelated through transactions uncertainty. It was shown that because of this transactions uncertainty, hedging behavior was perfectly rational within an expected utility maximizing framework. Extending the model from a structure with one kind of loan and deposit to loans and deposits with many maturities should lead to further interesting insights into margin determination especially as “portfolio” effects may become apparent.

Information

Type
Commercial Banking
Information
Journal of Financial and Quantitative Analysis , Volume 16 , Issue 4 , November 1981 , pp. 581 - 600
Copyright
Copyright © School of Business Administration, University of Washington 1981

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