Managing Net Interest Margin in Small and Large U.S. Banks:
Lessons from the 2007-2013 Financial Crises
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| Author | Pooran Lall |
| ISSN | 2307-2466 |
| On Pages | 30-41 |
| Volume No. | 5 |
| Issue No. | 1 |
| Issue Date | March 01, 2020 |
| Publishing Date | March 01, 2020 |
| Keywords | US banks, U.S. small banks, bank size, community bank, net interest margin. |
Abstract
The U.S. banking industry has experienced significant structural change over the past decade. Understanding how the relationships between the Net Interest Margin (NIM) and both internal and external factors change with each structural change can provide useful insights into how to improve the NIM after each change. Using the generalized least square, the impacts of these factors on NIM, over the 2007-2013 financial crisis periods, were determined. Overall, results indicate that in both large and small banks, the bank risk related variables (interest rate risk, liquidity risk, capitalization risk and credit risk) appear to explain most of the variation in NIM (52% and 77%), followed by the market related variables (lending rate and portfolio diversification). Specific results indicate that in both large and small banks, NIM has a positive correlation with the interest rate risk, liquidity risk, and capitalization risk and credit risk variables. The lending rate, portfolio diversification, and macroeconomic variables were also positive. The correlation coefficient of each variable, except for interest rate risk, lending rate and the portfolio diversification variables, appear to be stronger in favor of large banks compared with small banks, suggesting that at the industry level, strategies aimed at improving liquidity risk, capitalization risk and credit risk could have a stronger impact on the NIM in large banks compared with small banks. Strategies to improve interest rate risk, lending rate and portfolio diversification in small banks are likely to have a greater impact on the NIM in small banks. The overall coefficient of determination (R-squared) is lower in small banks compared with large banks (about 70% vs 91 %), suggesting that additional factors need to be considered in order to more fully explain the NIM in small banks.
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