The Determinants of Bank Interest Margins when Deposit Insurance Tied to Interest Rates: Evidence from Azerbaijan
21 Pages Posted: 14 Dec 2009 Last revised: 16 Dec 2009
Date Written: December 11, 2009
This paper studies the determinants of bank interest margins in an environment when government insurance on deposits is tied to the refinancing rate set by the Central Bank. We use the most recent data on the banks in Azerbaijan during the period 2006-2009. By extending Ho and Saunders model, we find that when refinancing rates are increased by one percent, the banks increase their interest margins by 0.4 percent in order to eliminate additional interest rate risk caused by increase in supply of deposits. We also find that oil prices are negatively related with margins. An increase in oil prices makes banks less risk averse, there for lower interest margins. Further impact of other bank-related and macroeconomic variables is presented. We also study the determinants of interest margins for various bank sizes separately.
Keywords: banking, interest margins, interest rates, profitability, deposit insurance
JEL Classification: E44, E53, G21
Suggested Citation: Suggested Citation