Why Are Net Interest Margins of Large Banks So Compressed?

Abstract

This note analyzes recent trends in net interest margins (NIMs) at domestic bank holding companies.

Cyclical Properties of Bank Margins: Small versus Large Banks

“…Note that the level of NIM at small banks is greater than the NIM at large banks in almost all quarters in the sample. This feature may re ‡ect some local monopoly power of small banks in their local areas, Covas et al (2015) attribute the recent (since 2010) compression of NIM at large banks to smaller declines in funding costs relative to small banks and to declining interest income from short-term trading accounts, which makes up a greater percentage of interest income for large banks than for small banks.…”

“…In particular, Claessens et al (2017) document low levels of net interest margins in the current low nominal rate environment in a cross section of banks from forty-seven countries. In the US data, Covas et al (2015) demonstrate the di¤erence in the level of NIM between small and large banks in the last twenty years, as well as the widening of this spread since 2010. They do not systematically investigate the cyclical properties of NIM at small banks, which is our focus here.…”

Overcapacities in Banking: Measurements, Trends and Determinants

“…The implications may vary with bank size though (e.g. Genay and Podjasek (2014), Covas et al (2015)). That said, a number of studies find that the adverse impact of low/negative interest rates on bank performance tends to be offset by the positive effect of low interest rates on bank profitability via increased lending volumes and improved credit quality (e.g.…”

Digitalization of the Process Landscape for Proprietary Bond Trading

“…Savers receive lower interest rates in their savings accounts, but borrowers of a mortgage on a home also pay lower interest rates. Critically for a bank, the difference between the two rates also tends to fall, resulting in lower profit margins for the bank (Covas, et al, 2015).…”