Bank management of the net interest margin: New measures

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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 findings 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.
Original languageEnglish
JournalFinancial Markets and Portfolio Management
Volume27
Issue number3
Pages (from-to)275-297
Number of pages23
ISSN1555-4961
DOIs
Publication statusPublished - 2013

    Research areas

  • Management studies - Balance-sheet composition, Banking, Net interest margin

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