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Financ Mark Portf Manag (2013) 27:275297 DOI 10.1007/s11408-013-0212-y
Bank management of the net interest margin: new measures
Christoph Memmel Andrea Schertler
Published online: 27 June 2013 Swiss Society for Financial Market Research 2013
Abstract We decompose the change in banks net interest margin into a change in market-wide bank rates and a change in balance-sheet composition. The usefulness of this decomposition is illustrated for a detailed data set of German bank balance sheets, broken down into different maturities, creditors and borrowers, and degrees of liquidity. Our main ndings are as follows. (1) Changes in market-wide bank rates have a much higher explanatory power for net interest margins than changes in balance-sheet composition. (2) On average, banks employ interest rate derivatives to hedge on-balance risk since changes in market-wide rates affect the net interest margin less strongly for derivatives users than for non-users. (3) When risk taking becomes more lucrative, derivatives users tend to increase their on-balance exposure more than do non-users.
Keywords Net interest margin Banking Balance-sheet composition
JEL Classication G21
The views expressed in this paper are those of the authors and do not necessarily reect the opinions of the Deutsche Bundesbank. We thank an anonymous referee, Rima Turk Ariss, Fabiana Gomez and participants of the Bundesbank Research Seminar, the Swiss Society for Financial Markets Research 2012, and the Eastern Finance Conference 2012 for their helpful comments.
C. Memmel (B)
Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt, Germany e-mail: [email protected]
A. SchertlerLeuphana University, Scharnhorststrasse 1, 21335 Lneburg, Germany e-mail: [email protected]
A. SchertlerUniversity of Groningen, Groningen, The Netherlands
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276 C. Memmel, A. Schertler
1 Introduction
Banks play an important role in economic prosperity by means of three main transformation functions: term, liquidity, and risk transformations. The income generated by these transformations or, more precisely, banks net interest margin, determines the social costs of nancial intermediation. We offer new measures of bank management of the net interest margin, dened as the difference between interest revenues and expenses per unit of assets, by decomposing the change in the margin into three components. The rst component, which we call price change, captures how changes in market-wide bank rates for various on-balance assets and liabilities contribute to the change in the net interest margin. These price changes include...