Sep 21, 2007

Articles in journals

Abreu, M., Mendes, V.

14

This paper studies bank’s sensitiveness to monetary and exchange rate policy as well as to financial instability. We evaluate whether these variables influence bank interest margins, combining a broad cross section of balance sheet and income statement information of banks in 12 European countries, controlling for microeconomic variables and allowing for the heterogeneity of the banking industry. We conclude that European banks are sensitive to international financial instability (particularly to exchange rate and interest rate instability), but the way banks feel the risk of a liquidity problem depends on bank specialization. Our results help one to understand some of the concerns related to the recent financial events linked to the sub-prime crises. In fact, the instability of international financial markets is not good for banks insofar as higher international interest rate and exchange rate volatility have a negative impact on the net interest margin. Nevertheless, the impact is stronger for commercial banks. We do not find any impact of the domestic interest rate volatility. As regards the regulatory environment, we anticipate that the opening up and development of the banking industry in more restricted economies will have contradicting effects on the interest margin, of which the global outcome is unclear.

Bank interest margins,Exchange rate,Interest rate,Banks