Abstract
This paper empirically examines the determinants of margins for a unique dataset of 1,190,811 mortgage loans with fixed interest rates of eight Swiss banks over the period from 2001 to 2011. Our margin determinants include loan-specific factors as well as external and bank-specific characteristics, some of which have not been considered in previous studies. Our results reveal that loan-specific factors such as repricing, representing the credit period until the interest rate is newly set, and loan volume explain a substantial part of our dependent variable. Furthermore, external factors also significantly affect mortgage loan margins. Mortgages granted in cities have lower interest rates than those allocated in rural areas. The role of competition is also considered and the findings show that margins are higher in less concentrated and thus less competitive markets. Declining mortgage loan margins can be further explained by means of increasing operational efficiency and the mortgage growth strategy of a bank.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
In order to check for multicollinearity, we computed the VIFs of all independent variables based on our OLS regression. VIFs are obtained by regressing an explanatory variable i on all other independent variables.
References
Afanasieff T, Lhacer P, Nakane M (2002) The Determinants of Bank Interest Spread in Brasil. Banco Central do Brasil, Working Paper Series No. 46, São Paulo
Altunbas Y, Evans L, Molyneux P (2001) Bank ownership and efficiency. J Money, Credit, Bank 33(4):925–954
Angbazo L (1997) Commercial bank Net interest margins, default risk, interest-rate risk and Off-balance sheet banking. J Bank Financ 21(1):55–87
Berger AN, Udell GF (1995) Relationship lending and lines of credit in small firm finance. J Bus 68(3):351–381
Bernanke B, Gertler M (1989) Agency costs, Net worth, and business fluctuations. Am Econ Rev 79(1):14–31
Bossone B, Honohan P, Long M (2002) Policy for small financial systems. In: Caprio G, Honohan P, Vittas D (eds) Financial sector policy for developing countries: a reader. Worldbank, Washington
Bourassa S, Hoesli M, Scognamiglio D (2010) Housing finance, prices, and tenure in Switzerland. J Real Estate Lit 18(2):263–282
Claeys S, Vander Vennet R (2008) Determinants of bank interest margins in central and eastern Europe: a comparison with the west. Econ Syst 32(2):197–216
Cole RA (1998) The importance of relationships to the availability of credit. J Bank Financ 22(6–8):959–977
Demirguc-Kunt A, Huizinga H (1999) Determinants of commercial bank interest margins and profitability: some international evidence. World Bank Econ Rev 13(2):379–408
Demirguc-Kunt A, Laeven L, Levine R (2003) The Impact of Bank Regulations, Concentration, and Institutions on Bank Margins. World Bank Policy Research Working Paper
Dietrich A (2012) Explaining loan rate differentials between small and large companies: evidence from Switzerland. Small Bus Econ 38(4):481–494
Dietrich A, Wanzenried G (2012) Determinants of bank profitability before and during the crisis: evidence from Switzerland. J Int Financ Mark Inst Money 21(3):307–327
Dietsch M, Petey J (2004) Should SME exposures be treated as retail or corporate exposures? a comparative analysis of default probabilities and asset correlations in French and German SMEs. J Bank Financ 28(4):773–788
Elsas R, Krahnen JP (1998) Is relationship lending special? evidence from credit-file data in Germany. J Bank Financ 22(10–11):1283–1316
Gambacorta L (2008) How Do banks Set interest rates? Eur Econ Rev 52(5):792–819
Gilbert RA (1984) Bank Market Structure and Competition: A Survey. Journal of Money, Credit and Banking 16 (4, Part 2: Bank Market Studies), 617–645
Gischer H, Juttner D (2003) Global competition, Fee income and interest rate margins of banks. Kredit and Kapital 36(3):368–394
Gujarati DN (1995) Basic econometrics. McGraw Hill, New York
Hawtrey K, Liang H (2008) Bank interest margins in OECD countries. North Am J Econ Financ 19(3):249–260
Ho T, Saunders A (1981) The determinants of banks interest margins: theory and empirical evidence. J Financ Quant Anal 16(4):581–600
Huybens E, Smith BD (1999) Inflation, financial markets and long-Run real activity. J Monet Econ 43(2):283–315
Keeton W, Morris C (1988) Equilibrium Credit Rationing, 1. Edition, New York
Kennedy P (2008) A guide to econometrics. Blackwell Publishing, Malden
Kiyotaki N, Moore J (1997) Credit cycles. J Polit Econ 105(2):211–248
Laeven L, Majnoni G (2005) Does judicial efficiency lower the cost of credit? J Bank Financ 29(7):1791–1812
Lea M (2010) International Comparison of Mortgage Product Offerings. Research Institute for Housing America
Lopez JA (2004) The empirical relationship between average asset correlation, firm probability of default, and asset size. J Financ Intermed 13(2):265–283
Machauer A, Weber M (1998) Bank behaviour based on internal credit ratings of borrowers. J Bank Financ 22(10–11):1355–1383
Maudos J, de Guevara J (2004) Factors explaining the interest margin in the banking sectors of the European Union. J Bank Financ 28(9):2259–2281
Mulder M (2014) The impact of concentration and regulation on competition in the Dutch mortgage market. J Compet Law & Econ 10(4):795–817
Samuelson PA (1945) The effect of interest rate increases on the banking system. Am Econ Rev 35(1):16–27
Saunders A, Schumacher L (2000) The determinants of bank interest rate margins: an international study. J Int Money Financ 19(6):813–832
Sinkey J, Greenawalt M (1991) Loan-loss experience and risk-taking behaviour at large commercial banks. J Financ Serv Res 5(1):43–59
SNB FSR (2010) Bericht zur Finanzmarktstabilität. Nationalbank, Schweizerische
State Secretariat for Economic Affairs (2014) Quartalsaggregate des Bruttoinlandprodukts. Verwendungsansatz (SECO/DPKJ), Bern
Swiss Bankers Association (2014) 2014 Banking Barometer: Economic trends in the Swiss banking industry. Basel, September 2014
Swiss National Bank (2012) Financial Stability Report Zurich, June 2012
Swiss National Bank (2013a) Zinssätze für Hypotheken
Swiss National Bank (2013b) Bankenstatistisches Monatsheft
Swiss National Bank (2014) Bankenstatistisches Monatsheft Juni 2014. Zürich, Switzerland
Titman S, Tompaidis S, Tsyplakov S (2005) Determinants of credit spreads in commercial mortgages. Real Estate Econ 33(4):711–738
Valverde S, Rodriguez Fernandez F (2007) The determinants of bank margins in European banking. J Bank Financ 31(7):2043–2063
Van den Heuvel S (2002) Does bank capital matter for monetary transmission? Economic Policy Review, Federal Reserve Bank of New York, May, 259–265
Vander Vennet R (2002) Cost and profit efficiency of financial conglomerates and universal banks in Europe. J Money, Credit, Bank 34(1):254–282
Acknowledgments
We would like to thank the participants of the 2014 World Finance Conference, the participants of the 2013 Midwest Finance Association Conference in Chicago, the participants of the 2011 Southwestern Finance Association Annual Meeting in Houston TX and Rebel Cole, Horst Bienert and Christian Wunderlin for their valuable comments.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Dietrich, A. What Drives the Gross Margins of Mortgage Loans? Evidence from Switzerland. J Financ Serv Res 50, 341–362 (2016). https://doi.org/10.1007/s10693-015-0229-7
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10693-015-0229-7