tailieunhanh - Determinants of commercial bank interest margins and profitability: some international evidence

In the next section we outline some theoretical and empirical results about the relationships between monetary policy, the ináation target of monetary authorities, the level of this target perceived by the public and the long term interest rates dynamics. In section 3, we present the works of Kozicki and Tinsley (1998, 2001a, 2001b) and we establish the interest of this model in our framework. We also provide an illustration of the advantage of the shifting endpoint speciÖcation in comparison to traditional stationary and nonstationary speciÖcations when autoregressive models are used to produce long-horizon expectations. In section 4 we propose two speciÖcations for the long-term perception of the monetary authoritiesíináation. | Determinants of commercial bank interest margins and profitability some international evidence Asli Demirgũẹ-Kunt and Harry Huizinga1 First draft June 1997 Second draft January 1998 Abstract Using bank level data for 80 countries in the 1988-1995 period this paper shows that differences in interest margins and bank profitability reflect a variety of determinants bank characteristics macroeconomic conditions explicit and implicit bank taxation deposit insurance regulation overall financial structure and several underlying legal and institutional indicators. Controlling for differences in bank activity leverage and the macroeconomic environment we find that a larger bank asset to GDP ratio and a lower market concentration ratio lead to lower margins and profits. Foreign banks have higher margins and profits compared to domestic banks in developing countries while the opposite holds in developed countries. Also there is evidence that the corporate tax burden is fully passed on to bank customers. Keywords bank profitability taxation financial structure JEL Classification E44 G21 1 Development Research Group The World Bank and Development Research Group The World Bank and CentER and Department of Economics Tilburg University respectively. The findings interpretations and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank its Executive Directors or the countries they represent. We thank Jerry Caprio George Kaufman Mary Shirley and 1998 AEA session participants for comments and suggestions. We also thank Anqing Shi for excellent research assistance and Paulina Sintim-Aboagye for help with the manuscript. 1. Introduction As financial intermediaries banks play a crucial role in the operation of most economies. Recent research as surveyed by Levine 1996 has shown that the efficacy of financial intermediation can also affect economic growth. Crucially financial intermediation affects the net .