Banks' Net Interest Margins and Interest Rate Risk: Communicating Vessels?

34 Pages Posted: 13 Mar 2020

See all articles by Raymond Chaudron

Raymond Chaudron

De Nederlandsche Bank

Leo de Haan

International Institute of Social Studies of Erasmus University

Marco Hoeberichts

De Nederlandsche Bank

Date Written: March 6, 2020

Abstract

This study investigates the effects of a flattening of the yield curve and decreasing interest rates on the net interest margin (NIM) of 41 Dutch banks during the period 2008Q1 to 2016Q2. Our contribution to the literature is that we distinguish explicitly between net interest income from pure maturity transformation and a residual part representing market power, compensation for risks and other markups. Our results show that the residual part increased when the yield curve flattened and interest rates fell, while total NIM remained constant. In other words, banks managed to keep net interest margins more or less constant by compensating for a loss in income from maturity transformation.

Keywords: net interest margin, banks, interest rate risk, income from maturity transformation

JEL Classification: D21, D22, G21

Suggested Citation

Chaudron, Raymond and de Haan, Leo and Hoeberichts, Marco, Banks' Net Interest Margins and Interest Rate Risk: Communicating Vessels? (March 6, 2020). De Nederlandsche Bank Working Paper No. 675, Available at SSRN: https://ssrn.com/abstract=3553265 or http://dx.doi.org/10.2139/ssrn.3553265

Raymond Chaudron (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Leo De Haan

International Institute of Social Studies of Erasmus University ( email )

Kortenaerkade 12, 2518 AX
The Hague, South Holland 2518 AX
Netherlands

Marco Hoeberichts

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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