Commercial banks provide direct financing to all sorts of business activities. They provide commercial loans with deposits from the public. The interest rate margin between lending and borrowing is the main source of profits for most banks. This paper examines the factors influencing the interest rate margin charged by commercial banks in Taiwan and determines their significance.
Using the interest-rate model by Ho and Saunders, we separate the factors that have influence on the interest rate margin into three categories: regulations, the efficiency of internal management, and external competition and macroeconomic environment. We then select appropriate variables and examine the variables with regression analysis. We use the readily available macroeconomic variables as our selection universe. Our two-stage screening involves (1) regressing variables to interest rate margins and (2) testing the significance of the variables used to explain interest rate margins. In the screening process, we use initial value, variation, and variation rate for both the independent and dependent variables.
Our research draws two conclusions. First, the independent variables that have influence on the interest rate margin from our first-stage screening are inter-bank rates, overall consumer credit, non-performing loans, and GDP growth rate. If variation of the interest rate margin is used as dependent variable, the independent variables are net reserve in excess, inter-bank rates, and overall consumer credit. Overall consumer credit and check bounce rate are the two independent variables if we use variation rate as the dependent variable.
Secondly, we determine that there are six independent variables that are positively related to the interest rate margin: inter-bank rates, variation of inter-bank rates, non-performing loans, variation of net reserve in excess, variation of overall consumer credit, and variation rate of check bounce rate. Overall consumer credit, variation rate of overall consumer credits, and GDP growth rate are among the independent variables that are negatively related to the interest rate margin.