ABSTRACT
The contribution of this paper is to incorporate the shift from traditional intermediation services to transaction banking in an empirical model of interest margins. The balance sheets of today’s banks are an assortment of ROM elements (loans and deposits) and TOM elements (securities and money-market funding). Banks conducting business in the international money and capital markets hold little market power. As a result, near-competitive conditions hold, and TOM-margins will either be thin or reflect (excessive) risk taking. For the ROM-share of the balance sheet, however, different conditions hold and banks may be able to exploit market power due to local presence or information monopolies. A bank’s overall net interest margin will reflect the composition of the balance sheet, and specifically the allocation across ROM-and TOM-activities. The strategic repositioning from ROM towards TOM can thus provide an explanation for the negative relationship between concentration ratios and interest margins that is occasionally found in the literature (Maudos and De Guevara 2004). When transaction banking and bank consolidation are two contemporaneous trends, a larger concentration ratio is likely to coincide with lower interest margins. It is therefore important to disentangle the TOM effect by including a variable measuring the shift to transaction banking into an empirical model of interest margins.
