Open AccessInterest Margins and Banks’ Asset-Liability Composition
Author(s) -
Idrees Khawaja
Publication year - 2011
Publication title -
the lahore journal of economics
Language(s) - English
Resource type - Journals
eISSN - 1811-5446
pISSN - 1811-5438
DOI - 10.35536/lje.2011.v16.isp.a11
Subject(s) - monetary economics , debt , interest rate , economics , asset (computer security) , bond , investment (military) , liability , net interest margin , financial system , business , finance , return on assets , computer security , politics , profitability index , computer science , law , political science
This article examines the determinants of banks’ interest margins. Theresults suggest that short-term government bonds (floating debt) and the largeshare of interest-insensitive deposits held by banks are the key determinants ofthe interest margin. This is in contrast to the popular perception that the marketpower of the oligopolistic industry contributes to banks’ high interest margins.While a behavioral change—a greater inclination to save and an increase inoutput—might reduce the share of interest-insensitive deposits, the reduction ingovernment debt depends on the state of certain macro-variables andmacroeconomic management. Given these determinants and the possible ways ofcontaining margins, the containment process is a tall order. The study alsoimplicitly confirms that government borrowing is crowding out privateinvestment.