Widget Bank Case Study

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The term α/β is a proxy of market power, L are loans, D are deposits, Q is the average size of the bank’s operations, R is a measure of absolute risk aversion, σ2 is the credit risk, σ2 is the 16 volatility in the money market interest rate (represent reinvestment and refinancing risk), σ2Q is the interaction between credit risk and market risk, and C is the operating costs. II.2.3 Maudos & Fernández de Guevara (2004) Following the study model of Maudos &Fernández de Guevara (2004), are used filters according to two criteria: Firstly for the new banks that are created during the period under review, are removed from the study details of the first year of operation, to avoid the effect of any abnormal value data.

The banks that we have selected represent 80% of the total assets of the system. Data were extracted from the Bank’s audited Financial Statements and Data cover time span between 2008-2013. We use as a dependent variable the bank’s net interest margin, defined as interest income minus interest expenses divided by total assets, which measures also the cost of financial intermediation. Based on the theory of the determinants of bank interest margins (Maudos and Fernandez de Guevara [2004] for the most recent framework for the bank dealership model), the bank specific variables considered in our estimation are as follows:  Efficiency index proxies for the cost of servicing and monitoring transactions, among others, and is measured by the ratio of operating gross to gross income. Less efficient banks, experiencing larger operating costs, tend to require higher margins. A positive coefficient on this variable is expected.  Size of operation is

The policy rate is the refinancing rate at the central bank, and it controls for monetary policy. 18 III. Empirical analyses of the interest margin for Albanian Banking Sector III.1 Empirical approach, data and methodology The empirical approach to investigate factors affecting interest margin applied by banks in Albania would start from the theoretical model and construct a reduced form empirical equation of bank margins which will include the four main sources of influence on interest margins (IM), the market power (MP) and risk (RA-risk aversion), bank specifics (BS) aspect of operations and efficiency, banking diversification (SP) of service provided and the general economic environment (Econ). 퐼푀푖,푡=푓(푀푃푖,푡,,푅퐴푖,푡,퐵푆푖,푡푆푃푖,푡퐸푐표푛푖,푡) (6) The empirical analyses was performed on a sample of 11 banks operating in Albania (out of a total of 15 banks operating), for 2008-2013. The selected banks represent 80% of the banking sector assets. The data were taken from the annual audited financial reports, published through banks websites. (Appendix 1). Five different measures of bank interest margin were constructed and used as dependent variable, mainly to account for the difficulty of designing an empirical measure of interest margin that