The empirical literature using cross-country samples or focusing on a single developed or developing country broadly confirms the predictions of the theory. Spreads are found to be positively related to banks’ operating costs, suggesting that banks pass on to their customers their higher transformation costs (see, for example, Maudos and Fernandez de Guevara, 2004; Carbó Valverde and Rodriguez, 2007; Williams, 2007; Beck and Hesse, 2009). There is also a consensus that intermediation spreads tend to increase with market power and low competition (see, for example, Angbazo, 1997; Saunders and Schumacher, 2000; Dabla-Norris and Floerkemeier, 2007; Williams, 2007; Almarzoqi and Ben Naceur, 2015). Finally, research shows a consistently positive relationship between bank margins and interest rate risk (see Maudos and Fernandez de Guevara, 2004; and Maudos and Solis, 2009, among others), indicating that banks facing uncertainty and volatility require a higher premium to compensate for reinvestment risk and refinancing risk.

With regard to other determinants of interest margins, findings are more mixed. For example, some studies (Ho and Saunders, 1981; and Maudos and Solis, 2009, among others) find a positive association between net interest margins and the size of the operations (proxied by the log of total assets or total loans), suggesting that the larger the transaction the larger the expected loss, while others (for example, Angbazo, 1997; and Maudos and de Guevara, 2004) report a negative relationship, pointing to the presence of economies of scale in financial intermediation. Similarly, while most of the papers find that credit risk exerts a positive effect on margins (see, for example, Angbazo, 1997; Maudos and Fernandez de Guevara, 2004), suggesting that banks charge a risk premium to compensate for credit risk, others (for example, Williams, 2007; Fungáčová and Poghosyan, 2011) find a negative relationship between credit risk and interest margins, interpreting this result as evidence that banks are unable to accurately price risk or that depositors require a higher risk premium for putting their money in riskier banks. Finally, Saunders and Schumacher (2000) and Brook and Rojas (2000), among others, find that risk aversion, proxied by the capitalization ratio, positively determines interest margins, implying that those banks that are more risk averse demand a higher premium to compensate for the higher costs of equity financing compared to external financing. However, for example, Dabla-Norris and Floerkemeier (2007) and Horvath (2009), find a negative association between capitalization and net interest margins, suggesting that less capitalized banks have to take on more risks (translating into higher margins) to receive higher returns and internally boost their reserves.

In recent years, studies have begun exploring the potential impact of bank ownership on net interest margins. Micco et al. (2007) and Fungáčová and Poghosyan (2011) find that the form of bank ownership has a strong impact on bank margins in developing countries and the Russian Federation, respectively. Martinez and Mody (2004) find that in Latin America foreign banks can charge lower spreads relative to local banks, while the opposite conclusion is obtained by Schwaiger and Liebig (2008) for a sample of CEE economies. No effect of foreign ownership is found by Dabla-Norris and Floerkemeier (2007) in Armenia, and by Beck and Hesse (2009) in Uganda.

Few papers examine the role of macroeconomic conditions and the regulatory framework in explaining banks’ intermediation spreads. For example, Demirgüç-Kunt et al. (2004) and Claeys and Van der Vennet (2008) find a positive relationship between inflation and bank margins, while Brock and Rojas (2000), Saunders and Schumacher (2000) and Gelos (2006) show that higher reserve requirements are associated with higher spreads. Others (for example, Demirgüç-Kunt et al., 2004, Gelos, 2006, and Poghosyan, 2012) control for the quality of the institutional and legal setup and find that in general less supportive environments are associated with higher margins.

This paper adds to existing studies on two main fronts. First, using bank-level panel data on more than 14,000 commercial banks in 160 countries for the period 2005-2014, and controlling for country-level 3