Determinants of Net Interest Margins In Taiwan Banking Industry

Abstract

Classical models of the net interest margins assume that all banks belong to the identical banking system in a country. However, two or more kinds of banking systems maybe exist simultaneously in one country such as Taiwan. We name this as Partial Universal Banking System. By taking the ratio of net non-interest income to total operating income as a threshold variable, we prove that the banking in Taiwan is indeed characteristic of partial universal banking system; that is, it can be divided into two classes: one is inclined to Separated Banking System, and the other tends to Universal Banking System. We also display the process of dynamic transformation in Taiwan banking industry from 1993 to 1999. Finally, we find that the net interest margins in separated banking system are affected by credit risk, interest rate risk, the degree of leverage and management quality, whereas the net interest margins of universal banking system are sensitive to credit risk and the degree of leverage Key words:Net interest margins, Partial universal banking system, Panel data threshold model

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