Determinants of Bank Interest Margins: Impact of Maturity Transformation

Posted: 7 Jul 2012 Last revised: 6 Feb 2015

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Christoph Memmel

Deutsche Bundesbank

Benedikt Ruprecht

Deutsche Bundesbank

Marco Wilkens

University of Augsburg

Multiple version iconThere are 2 versions of this paper

Date Written: February 6, 2015

Abstract

This paper explores the extent to which interest risk exposure is priced in bank margins. Our contribution to the literature is twofold: First, we extend the Ho and Saunders (1981) model to capture interest rate risk and expected returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit intermediation fees, but reduce (increase) these charges for loans (deposits) when positive excess holding period returns from long-term exposures are expected. Second, we test the model-derived hypotheses not just for the commonly investigated net interest margin but also for interest income and expense margins separately in a sample encompassing the German universal banking sector between 2000 and 2009. We find that banks price their individual interest rate risk and corresponding expected excess holding period returns via the asset side into the net interest margin. For liabilities, we find interest rate risk exposure only priced by smaller, local banks.

Keywords: term transformation, interest rate risk, optimal loan, deposit intermediation fees

JEL Classification: D21, D22, G21

Suggested Citation

Entrop, Oliver and Memmel, Christoph and Ruprecht, Benedikt and Wilkens, Marco, Determinants of Bank Interest Margins: Impact of Maturity Transformation (February 6, 2015). Journal of Banking and Finance, Vol. 54, 2015, pp. 1-19. Available at SSRN: https://ssrn.com/abstract=2101815 or http://dx.doi.org/10.2139/ssrn.2101815

Oliver Entrop (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Christoph Memmel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Benedikt Ruprecht

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 9566 - 8618 (Phone)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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