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Volume 69, Issue 5

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Key Determinants of the Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates

Hanzlík, Petr; Teplý, Petr

Year: 2019   Volume: 69   Issue: 5   Pages: 416-439

Abstract: In this paper, we analyse a relationship between the net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature by examining a large sample of annual data on 629 banks from EU member countries for the 2011-2016 period, which also covers the period of zero and negative rates. When testing three research hypotheses, we draw three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship between NIM and short-term interest rates observed in previous studies, which supports the suspected nonlinearity in an interest rate zero lower bound situation. In contrast to other researchers, we find a negative relationship between the NIM of EU banks and the yield curve slope.

JEL classification: C33, E43, G21

Keywords: banks, net interest margin, Herfindahl index, low-interest rate environment, profitability, system GMM

RePEc: xxx

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