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The Determinants of Bank Interest Margins: A Note

Published online by Cambridge University Press:  06 April 2009

Linda Allen
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 2 , June 1988 , pp. 231 - 235
Copyright
Copyright © School of Business Administration, University of Washington 1988

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References

Ho, T. S. Y., and A. Saunders. ”The Determinants of Bank Interest Margins: Theory and Empirical Evidence.” Journal of Financial and Quantitative Analysis, 16 (11 1981), 581–600.CrossRefGoogle Scholar
Ho, T., and H. Stoll. ”The Dynamics of Dealer Markets under Competition.” Journal of Finance, 38 (09 1983), 1053–1074.CrossRefGoogle Scholar