The determinants of bank margins revisited: a note on the effects of diversification
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Universidad de Granada. Departamento de Teoría e Historia Económica
Bank marginsSpecializationMarket structure
Carbó Valverde, S.; Rodríguez Fernández, F. The determinants of bank margins revisited: a note on the effects of diversification. Universidad de Granada. Departamento de Teoría e Historia Económica (2005). (The Papers; 05/11). [http://hdl.handle.net/10481/31472]
SponsorshipFinancial support from the Spanish Savings Banks Foundation (FUNCAS) and MCYT-FEDER, SEC2002-00348.
Most of the theoretical and empirical literature on bank margins has dealt solely with interest margins. Applying the seminal Ho-Saunders model (JFQA, 1981) to a multi-output framework, we show that the relationship between bank margins and market power (controlling for risk) varies significantly across bank specializations. Using a set of both accounting margins and New Empirical Industrial Organization (NEIO) margins, we find that market power rises significantly with output diversification to wards non-traditional activities. These results contribute to explain the paradoxical coexistence of decreasing interest margins and higher market power found in previous studies.