Determinants of Bank Interest Margins: Impact of Maturity Transformation

56 Pages Posted: 21 Jun 2016

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: 2012

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 present an extended model of Ho and Saunders (1981) that explicitly captures interest rate risk and returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit rates, but reduce these charges when they expect returns from maturity transformation. Second, using a comprehensive dataset covering the German universal banks between 2000 and 2009, we test the model-implied hypotheses not only for the commonly investigated net interest income, but additionally for interest income and expenses separately. Controlling for earnings from bank-individual maturity transformation strategies, we find all banks to charge additional fees for macroeconomic interest volatility exposure. Microeconomic on-balance interest risk exposure from maturity transformation, however, only affects the smaller savings and cooperative banks, but not private commercial banks. Returns are only priced in income margins.

Keywords: Interest rate risk, Interest margins, Maturity transformation

JEL Classification: D21, G21

Suggested Citation

Entrop, Oliver and Memmel, Christoph and Ruprecht, Benedikt and Wilkens, Marco, Determinants of Bank Interest Margins: Impact of Maturity Transformation (2012). Bundesbank Discussion Paper No. 17/2012. Available at SSRN: https://ssrn.com/abstract=2796872

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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