Abstract:
This article examines the determinants of banks’ interest margins. The
results suggest that short-term government bonds (floating debt) and the large
share of interest-insensitive deposits held by banks are the key determinants of
the interest margin. This is in contrast to the popular perception that the market
power of the oligopolistic industry contributes to banks’ high interest margins.
While a behavioral change—a greater inclination to save and an increase in
output—might reduce the share of interest-insensitive deposits, the reduction in
government debt depends on the state of certain macro-variables and
macroeconomic management. Given these determinants and the possible ways of
containing margins, the containment process is a tall order. The study also
implicitly confirms that government borrowing is crowding out private
investment.
