The impact of market power and funding strategy on bank-interest margins

This paper investigates the implications of market power and funding strategics for bank-interest margins, using a sample of 978 banks in 55 emerging and developing countries over an eight-year period. 2000- 2007. We provide additional insight by examining the complex interlocking of three key variable? that arc important for regulators: the degree of market power, funding sources and bank performance. The result? show that market power increases when banks use internal funding to diversify into non-interest income- generating activities. We also find that the high net-interest margins of banks in emerging and developing countries can be explained by the degree of market power, credit risk, and implicit interest payments. In addition, our results suggest that interest margins among banks with market power arc significantly more sensitive to internally generated funds than they arc to deposit and wholesale funding.