Bank Interest Rate Margin, Portfolio Composition and Institutional Constraints

Abstract

The objective of this paper is to empirically determine the factors that impact bank interest margins in China. We use relevant banking data for the period 1998-2015. Importantly, we examine, how the composition of assets and liabilities impacts interest margins. To our knowledge this aspect has not been explored. We also consider the impact of institutional environment and market structure changes.

We found that the market pricing mechanism in interest rate hasn’t taken off yet despite the long-term reform by the Chinese government. Borrowing and lending rate are twisted. Foreign banks incorporated in China and the institutional settings represented by them have yet to exert any positive affect interest rate margins in China.

Keywords: Adjusted Interest Spread, composition of assets and liabilities, financial freedom, government spending

JEL Classification: G20