The Determinants of Bank Interest Margins: A Note

Linda Allen

Journal of Financial and Quantitative Analysis, 1988, vol. 23, issue 2, 231-235

Abstract: The Ho-Saunders model (1981) is extended to consider the case of loan heterogeneity. Pure interest spreads may be reduced when cross-elasticities of demand between bank products are considered. The resulting diversification benefits emanate from the interdependence of demands across bank services and products—a type of portfolio effect. Control over relative rate spreads, across product types, and the resulting ability to manipulate the arrival of transactions demands enables the financial intermediary to maintain a more active role in managing its inventory risk exposure.

Date: 1988
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