Factors Explaining the Interest Margin in the Banking Sectors of the European Union

Maudos, Joaquin and Fernandez de Guevara, Juan (2003): Factors Explaining the Interest Margin in the Banking Sectors of the European Union. Published in: Documentos de Trabajo, Fundación de las Cajas de Ahorros (2003)

Abstract

This study analyses the interest margin in the principal European banking sectors (Germany, France, the United Kingdom, Italy and Spain) in the period 1993-2000 using a panel of 15,888 observations, identifying the fundamental elements affecting this margin. Our starting point is the methodology developed in the original study by Ho and Saunders (1981) and later extensions, but widened to take banks’ operating costs explicitly into account. Also, unlike the usual practice in the literature, a direct measure of the degree of competition (Lerner index) in the different markets is used. The results show that the fall of margins in the European banking system is compatible with a relaxation of the competitive conditions (increase in market power and concentration), as this effect has been counteracted by a reduction of interest rate risk, credit risk, and operating costs.

• Item Type: MPRA Paper
• Language: English
• Keywords: margins, competition
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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