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Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance

Published online by Cambridge University Press:  06 April 2009

Emilio R. Zarruk  and
Jeff Madura
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Abstract

This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the bank's interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 143 - 149
Copyright
Copyright © School of Business Administration, University of Washington 1992

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