Factors determining bank net interest margins in EU15

The main aim of this paper is to determine the key factors that affect the net interest margin of banks in the European banking industry and to what extent. Based on the existing literature, the effect of certain bank-, industry- and country-specific variables is estimated on a sample of 426 banks from 15 European countries over the sample period 2013-17. Owing to the highly persistent nature of bank profitability, a dynamic panel data model is estimated using system-GMM as developed by Blundell and Bond (1998). The results suggest that internal factors such as size of the bank, cost efficiency as well as how diversified its activities are, have a strong negative impact on bank net interest margin. Thus, in today’s era of digitalisation it is crucial for banks to be more cost-efficient by means of online banking and well diversified into non-traditional interest bearing activities, in order to remain profitable.