ABSTRACT
Using a comprehensive data set with bank-level data on over 16,000 Federal Deposit Insurance Corporation (FDIC)-insured US commercial banks for a period ranging from 1992 to 2010, this paper tests whether a bank’s business model is empirically important in explaining the size of bank interest margins. In addition to a number of univariate proxies commonly used in the literature, we utilize factor analysis to measure the variable of interest, i.e. relative adherence to ROM, using five different dimensions. In doing so, we provide a more detailed and accurate description of the chain of causality leading to lower interest margins in developed banking industries than the one that is available now. The key difference with the traditional explanation is that banks’ quest for growth, not the level of competition in traditional retail segments, has transformed banks’ balance sheets and has reduced interest rate margins as a by-product.
