The Korean Journal of Economic Studies
Analysis of Changes in Interest Margins of Korean Banks
Yoocheol Noh (Bank of Korea) and Seorim Jung (Bank of Korea)Year 2023Vol. 71No. 2
This paper analyzes the determinants of bank interest margin (loan interest rate - deposit interest rate) using a panel model with data from 13 commercial banks in Korea over the period of 2010-2022. To identify major determinants of interest margin, we applied Shapley decomposition methodology based on the results of fixed-effect estimation. Our empirical findings highlight that the Bank of Korea’s base rate, the composition of bank loans and deposits, risk premiums, banks’ lending attitudes and competition in the lending market acted as major drivers of changes in banks’ interest margins. The banks’ interest margins widened when the base rate rose, and it widened further when the proportion of floating rate loans or low-cost deposits increased. Also, banks widened interest margins when their market share in the loan market increased, and narrowed the margins when competition among banks sparked. These suggest that in order to curb excessive expansion of banks’ interest margins, we need to ease the rapid expansion of the proportion of floating rate loans during interest rate hikes and to continue competition among banks.