Journal of Banking & Finance Vol. 28 No. 8 2004
The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin
Abstract
Numerous studies have analyzed how a bank's intermediation margin varies with respect to such factors as credit quality, funding risk, bank capital, deposit insurance and other factors. However, these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise. Taking this very fundamental fact into account, we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals. Among other things, we find that greater volatility of interest rates tends to increase the margin. The strength of the correlation between the level of interest rates and the propensity to prepay loans (withdraw deposits) also plays an interesting role.
- DOI
- 10.1016/j.jbankfin.2003.05.002
- Volume
- 28
- Issue
- 8
- Pages
- 1825-1843
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib