Productivity of Banks: Implications for Interest Rates, Economic Profits and Branches.

42 Pages Posted: 12 Jul 2014

See all articles by Alfredo Martín‐Oliver

Alfredo Martín‐Oliver

University of the Balearic Islands

Sonia Ruano

Banco de España

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization

Date Written: July 11, 2014

Abstract

This paper examines the transmission of productivity differences among banks and of industry productivity growth over time to lower (higher) interest rates of loans (deposits) and higher customer accessibility to bank services. For this purpose, it models spatial competition in retail banking among bank branches with different productivity level. In the short-term banks compete in interest rates. In the mid-term, banks expand their network of branches until economic profits per branch converge to zero. In equilibrium, banks that are more productive set lower (higher) interest rates of loans (deposits) and their market share increases as a result of both a higher demand of loans and deposits per branch and a larger network of branches. The model fits well the data for Spanish banks over period 1993-2007.

Keywords: banking spatial competition, bank-branch productivity, interest rates, branches dynamics, bank’s economic profits.

JEL Classification: E43, G21, L11, O30, R32.

Suggested Citation

Martin-Oliver, Alfredo and Ruano, Sonia and Salas-Fumás, Vicente, Productivity of Banks: Implications for Interest Rates, Economic Profits and Branches. (July 11, 2014). Available at SSRN: https://ssrn.com/abstract=2464959 or http://dx.doi.org/10.2139/ssrn.2464959

Alfredo Martin-Oliver (Contact Author)

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain

Sonia Ruano

Banco de España ( email )

Madrid 28014
Spain

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization ( email )

Dr. Cerrada 1
5005 Zaragoza
Spain
+34 976 761803 (Phone)

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