Determinants of Bank Interest Rate Spread – An Empirical Evidence of First Comercial Bank

• Main Authors: Shih-Cheng Chen, 陳仕承
• Other Authors: 張嘉玲
• Format: Others
• Language: zh-TW
• Published: 2015
• Online Access: http://ndltd.ncl.edu.tw/handle/19498633060669749452

碩士 === 國立中興大學 === 應用經濟學系所 === 103 === Taiwan’s large number of banks has led to excessive competition in prices, as well as a decrease in profits because of open finance policies caused by globalization. Traditionally, banks focused mainly on deposits and loans, although the trend towards non-interest income has risen in recent years. Despite current trends, deposits and loans remain the major source of bank profits, as well as a significant indicator of a bank’s profits. The difference between the deposits and loans reflect not only a bank’s performance, but also its capability to undertake risks. This study examines First Bank in order to investigate the elements of variation in the difference between deposits and loans, including average lending interest rates, average deposit interest rates, overnight call rates, index of industrial production growth rates, M2 balance growth rates, SME loan growth rates, consumer loan growth rates, deposit growth rates and check deposit growth rates, as well as consumer price index growth rates retrieved from First Bank, the Central Bank, Directorate-General of Budget, Accounting and Statistics, and the database of Taiwan Economic Journal Co., Ltd. From August 2003 through September 2014, there were 134 shares of data. Using a multiple regression model created with the average lending interest rates, the weighted average overnight call rates, the index of industrial production growth rates and M2 balance growth rates, the empirical results show that when the lending rates are reduced in a certain month, then the difference between the deposits and loans would increase the following month. To maintain profits when the lending rates are reduced, the adjustment of deposit interest rates would be greater than such reductions in order to compensate for the lending rates; over the long term, the deposit and loan interest rates are both reduced. When the average overnight call rates are increased in a certain month, the difference between the deposits and loans is increased the following month. The overnight call shows that, over the short term, banks would make up a deficiency of deposit reserve and short-term funding needs. Higher overnight call rates correlate to higher short-term interest rates; when short-term interest rates raise, the raising deposit interest rates follow the lending interest rates. The multiple regression model is appropriate for predicting this phenomenon and is joined by an RMSE of 0.365 and MAE of 0.286. Since the two estimates are quite small, this model can be used by First Bank to determine the variations of deposits and loans.