Margins, competition, and monetary policychallenges in the banking industry

Resumen

The outbreak of the financial crisis in 2008 caused the revision of banking regulation. This thesis analyzes the effects on bank net interest margins of capital requirements and deposit insurance. The objective is to analyze to what extent the banks transfer to their clients both the new and stricter capital requirements and a more stringent deposit insurance scheme through greater interest margin. To do so, the seminal theoretical model of Ho and Saunders (1981) and some of its extensions are expanded to explicitly include these two dimensions as determinants of the net interest margin. The extension of the model predicts that the higher the capital requirements the higher banks’ interest rates will be. However, the effect of deposit insurance is not defined a priori, being an empirical issue. The results of the theoretical model are contrasted using a panel data from 31 OECD countries during the period 2000-2014, confirming the positive relationship between both the capital requirements and the deposit insurance premium and the net interest margin. The thesis also investigates the determinants of market power in the Spanish banking sector during the period 2006-2017, focusing on the effect of the evolution of the multimarket contact and its intensity. The idea is to contrast to what extent the reduction in the number of banks and branches, that is, the rise of concentration, has generated an increase in market power, with the consequent reduction in consumers’ welfare. To do so, a new multimarket contact indicator is proposed, which not only considers the existence of contacts between banks, but also their intensity. The main results suggest that once we control for the intensity of the multimarket contacts, there is evidence of collusion practices. Therefore, consolidation in the Spanish banking industry has led to an increase in market power, in part as a consequence of the mergers and acquisitions that have taken place. These operations have entailed both a decline in multimarket contacts and a rise of the intensity of these contacts. Finally, the effect of the current expansionary monetary policies on bank profitability is studied. More specifically, the effect of low interest rates and the flattening of the yield curve on the net interest margin and on profitability is measured. To do so, a panel data from 31 OECD countries during the period 2000-2017 is used. The main results show that the expansionary monetary policy measures have a negative impact on the bank net interest margin and, therefore, on bank profitability. The relationship of both interest rates and the yield curve slope with the interest margin and profitability is non-linear, particularly U-shaped form. This suggests that the impact of low interest rates is greater the lower they are. Similarly, the impact of the yield curve is greater the more flattened the curve is.