TAILIEUCHUNG - The Sensitivity of Bank Net Interest Margins and Profitability to Credit, Interest-Rate, and Term-Structure Shocks Across Bank Product Specializations

The data allow us to focus on eight basic questions about the microfinance “industry”: Who are the lenders? How widespread is profitability? Are loans in fact repaid at the high rates advertised? Who are the customers? Why are interest rates so high? Are profits high enough to attract profit-maximizing investors? How important are subsidies? How robust are the financial data? The answers then take us back to reconsider the initial questions of subsidy, profit, and social impact in microfinance. Who are the lenders? The clash between Grameen Bank and. | The Sensitivity of Bank Net Interest Margins and Profitability to Credit Interest-Rate and Term-Structure Shocks Across Bank Product Specializations Gerald Hanweck Professor of Finance School of Management George Mason University Fairfax VA 22030 ghanweck@ and Visiting Scholar Division of Insurance and Research FDIC Lisa Ryu Senior Financial Economist Division of Insurance and Research FDIC lryu@ January 2005 Working Paper 2005-02 The authors wish to thank participants at the FDIC s Analyst Economists Conference October 7-9 2003 and at the Research Seminar at the School of Management George Mason University for helpful comments and suggestions. The authors would also like to thank Richard Austin Mark Flannery and FDIC Working Paper Series reviewers for their comments and suggestions. All errors and omissions remain the responsibility of the authors. The opinions expressed in this paper are those of the authors and do not necessarily reflect those of the FDIC or its staff. The Sensitivity of Bank Net Interest Margins and Profitability to Credit Interest-Rate and Term-Structure Shocks Across Bank Product Specializations Abstract This paper presents a dynamic model of bank behavior that explains net interest margin changes for different groups of banks in response to credit interest-rate and term-structure shocks. Using quarterly data from 1986 to 2003 we find that banks with different product-line specializations and asset sizes respond in predictable yet fundamentally dissimilar ways to these shocks. Banks in most bank groups are sensitive in varying degrees to credit interest-rate and term-structure shocks. Large and more diversified banks seem to be less sensitive to interest-rate and term-structure shocks but more sensitive to credit shocks. We also find that the composition of assets and liabilities in terms of their repricing frequencies helps amplify or moderate the effects of changes and volatility in short-term interest rates on bank net .

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