What Determines Interest Margins? The Case of Chinese Banks

The Impact of Deregulation Trends on the Chinese Banks' Interest Margins

“…The first is a two-stage process, which is used by Ho and Saunders (1981), Saunders and Schumacher (2000) and Doliente (2005). On the other hand, McShane and Sharpe (1985) and Angbanzo (1997) propose an alternative single-stage approach, which includes both bank-specific characteristics and country-specific macroeconomic conditions as explanatory variables (Qi & Zhang 2018) (Note 2). Therefore, the single-step estimation approach is employed in this analysis.…”

“…1) HHI: Herfindahl-Hirschmann Index (HHI) is used to capture the market concentration, which is defined as the sum of the squares of the market shares of each bank. (Qi & Zhang, 2018, Maudos & Fernandez, 2004) Cetorelli and Gambera (2002) argue that the bank concentration can also have a depressing impact on growth.…”

“…2) Size: Total loan is used as a proxy of the size of individual banks (Qi & Zhang, 2018). Maudos and Fernandez de Guevara (2004) suggest a positive relationship between the bank interest spread and the average size of operations (Note 5).…”

“…Then a greater volume of interest margins is required to cover the cost. Therefore, a positive sign of opportunity is expected (Qi & Zhang, 2018). 4) Liquid_Risk: Following Angbazo (1997) and Qi and Zhang (2018), the ratio of liquid assets is used to total liabilities to proxy the liquid risk.…”

“…The loan to assets ratio is used to proxy the credit risk. (Maudos & Fernandez, 2004;Kasman et al, 2010;Qi & Zhang, 2018) Since the higher volume of loans granted is associated with higher credit risk exposure, we assume it has a positive impact on the interest margins.…”