Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates

Petr Hanzlík and Petr Teply
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Petr Hanzlík: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic

No 2019/2, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: In this paper, we analyse a relationship between net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature when examining a large sample of annual data on 629 banks from EU member countries during the 2011-2016 period, which also covers the period of zero and negative rates. We test three hypotheses and come to the three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship of NIM with short-term interest rate observed in previous studies, which supports the suspected non-linearity in situation of zero lower bound of interest rates. Contrary to other researchers, we find a negative relationship between NIM and the yield curve slope.

Keywords: banks; net interest margin; Herfindahl index; interest rates; profitability; system GMM (search for similar items in EconPapers)
JEL-codes: C33 E43 G21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-03, Revised 2019-03
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mac
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Journal Article: Key Determinants of the Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates (2019)
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