Interest Margins and Banks’ Asset-Liability Composition

Abstract

This article examines the determinants of banks’ interest margins. The results suggest that short-term government bonds (floating debt) and the large share of interest-insensitive deposits held by banks are the key determinants of the interest margin. This is in contrast to the popular perception that the market power of the oligopolistic industry contributes to banks’ high interest margins. While a behavioral change—a greater inclination to save and an increase in output—might reduce the share of interest-insensitive deposits, the reduction in government debt depends on the state of certain macro-variables and macroeconomic management. Given these determinants and the possible ways of containing margins, the containment process is a tall order. The study also implicitly confirms that government borrowing is crowding out private investment.