Determinants of Bank Interest Margins in the Caucasus and Central Asia

Abstract

In this paper, we use a bank-level panel dataset to investigate the determinants of bank interest margins in the Caucasus and Central Asia (CCA) over the period 1998–2013. We apply the dealership model of Ho and Saunders (1981) and its extensions to assess the extent to which high spreads of banks in the CCA can be related to bank-specific variables, to competition, and to macroeconomic factors. We find that interest spreads are affected by operating cost, credit risk, liquidity risk, bank size, bank diversification, banking sector competition, and macroeconomic policies; but the impact depends on the country.

Keywords: Banking sector, Central Asia and the Caucasus, Interest rates, Profit margins, Panel analysis, Econometric models, Cross country analysis, Interest margins, Operating costs, Market power, Macroeconomic policies, banks, risk, credit, credit risk

JEL Classification: E42, G20