The Determinants of Bank Interest Margins: A Note

Abstract

The Ho-Saunders model (1981) is extended to consider the case of loan heterogeneity. Pure interest spreads may be reduced when cross-elasticities of demand between bank products are considered. The resulting diversification benefits emanate from the interdependence of demands across bank services and products--a type of portfolio effect. Control over relative rate spreads, across product types, and the resulting ability to manipulate the arrival of transactions demands enables the financial intermediary to maintain a more active role in managing its inventory risk exposure.