The Determinants of Net Interest Margins of Commercial Banks in Mainland China

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Zhou, Kaiguo Wong, Michael C. S.(2008)? Published
in Emerging Markets Finance and Trade
Yang Peng (Emme)? MEcon 2008 2008967228
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• Overview and Background
• Paper Goals
• Theoretical Model
• Variables, Model and data
• Empirical Results
• Summary and Conclusions

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• Year 1996 to 2003
• Net Interests Margin of Banks
• Methodology Ho Saunders Model concludes
• The degree of competition of market
• The interest rate risk to which the bank is
  exposed

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• The Interest Margin of Chinas Commercial Banks
  Declines from 1996 to 2003

• The degree of market competition Cost
• Large asset size poor management
• Bank with larger credit risk

Interest margins
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• Empirical works before in the European Union,
  North America and Latin America
• Very little research has been done on the
  interest margin of commercial banks of China
• To study empirically the determinants of interest
  margin of Chinese commercial banks

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RL2
RL1
RD1
RD2
Risk RD1gtRD2
Risk RL2ltRL1
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• a b are margins relative to risk-free interest
  rate
• S is the absolute sum of the float values

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Initial wealth Asset Liabilities Position in
Money Market Final wealth
Credit risk interest risk Operating cost
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• Expected utility of final wealth determined by
• The probability of loan demand arrival(Pl) and
  the probability of deposit arrival(Pd) are both
  linear function of the interest rate spread (a or
  b)?

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• The optimal interest margin s

Money market interest rate risk
The covariance b/w interest risk credit risk
Competitive structure of the markets
Credit risk
Risk Aversion
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• Banks may pay implicit interests on deposits
• Banks may consider the opportunity cost of
  holding reserves

Set a higher interest margin
The greater the reserve size, the higher the
opportunity cost and the interest margin
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• Variables
• Average operating Costs(AOC)?
• Degree of bank management risk aversion(K_A)?
• Credit risk(Loan_Ratio)?
• Size of operations(SIZE)?
• Implicit Interest Payments(IIP)?
• Opportunity cost of bank reserves(OPPCOST)?
• Quality of Management(QUALITY)?

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• Model

Net interest margin
Individual effect
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Weak correlation between explanatory variables
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• Direct Factors affect on Interest Margin
• Market Competition
• Average Operating Cost
• Degree of bank management risk aversion
• Size of Operations
• Implicit interest payments
• Opportunity cost of bank reserves
• Quality of management

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• The degree of market concentration

the number of banks in China
competitive
Foreign banks
Suggestion 1.Diversity their business risk
2.Reduce their tremendous reliance on
traditional credit business 3. Improve management
quality and efficiency
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