Determinants of bank interest margins: Impact of maturity transformation

Oliver Entrop, Christoph Memmel, Benedikt Ruprecht and Marco Wilkens

No 17/2012, Discussion Papers from Deutsche Bundesbank

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 (search for similar items in EconPapers)
JEL-codes: D21 G21 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Determinants of bank interest margins: Impact of maturity transformation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:172012

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