Bank of Israel - Press Releases - Low Interest Rates and Banks’ Interest Margins: Does Deposit Market Concentration Matter?
Central bank: boi | Type: statement | Date: 2021-10-25

·It was found that the positive relationship is stronger at low,
near-zero, interest rate levels.
·It was also found that when the banking system is concentrated, changes
in the interest rate have almost no effect on the net margin. However, in a low
interest rate environment, interest rate changes impact the margin in
concentrated markets as well.
The
connection between the level of the interest rate in the economy and bank
performance is an important issue in understanding the impact of policy on the
banking system and on economic activity, particularly the credit market.
New
research conducted by Nimrod Segev, Sigal Ribon, and Miki Kahn of the Bank of
Israel Research Department, in collaboration with Jakob de Haan of the University
of Groningen, uses a broad and detailed database that incudes information on
banks in OECD countries for 1995–2019. It examines the factors that impact
banks’ net interest margin, and in particular how this spread is impacted by
the short term interest rate environment in the economy and by the extent of
competition in the country’s banking system. The research is part of a project
within the framework of IBRN (International Banking Research Network), an
international research group for collaboration among central banks on banking
issues.
The
research finds that the higher the short term interest rate in the economy is,
the larger the net interest margin—the gap between interest income on credit
and the cost of the banks’ sources. It also finds that in a concentrated
banking system, interest rate changes have almost no impact on the net margin.
However, in a low interest rate environment, interest rate changes impact on
the margin in concentrated markets as well.
In
recent years, particularly after the global financial crisis in 2008, the short
term interest rates worldwide declined markedly, and in many countries they
approached very close to zero. Figure 1 presents the range of interest rates in
OECD countries over the years, and it indicates the notable downward trend.