GENERAL AND SPECIFIC BEHAVIOR OF INTEREST MARGIN: EVIDENCE FROM POST CRISIS INDONESIAN BANKING
Keywords:
Net Interest Margin, Internal Characteristics, Panel DataAbstract
This study addresses one aspect of banking intermediation processes namely how banks set their interest margin. Building from existing theoretical framework as initialized by Ho and Saunders (1981) and further extended by Maudos and Guevara (2004), we propose an empirical scheme that focuses more on internal characteristics. Besides that, also try to investigate some possibilities of specific behavior pertinent to particular category of banks and persistence of profitability. Several findings on behavior variables confirm the theoretical conjecture: liquidity, efficiency, size of asset and macroeconomic condition. Other findings especially on interest rate volatility response and banking relationships provide unique and novel insights. Unlike predicted by theory, banks are unable to perform the role as funds dealer and absorb the cost of money market volatility. Relationship has enabled a certain category of banks to obtain higher interest margin than average.
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