Hong Kong Commercial Banks Net Interest Margin Factors

In order to keep a stable and efficient growth of its economy，Hong Kong hascompleted interest rate liberalization in2001. Although the interest rate liberalizationhelps improve the competition of the commercial banks and the growth of theeconomy, it can also have a shock on the Net interest margin (NIM) of thecommercial banks. NIM (Net interest margin) is the important source ofcommercial banks’ profit. It can reflect its own efficiency and the transaction cost ofthe financial intermediaries during the resource allocation. Not only can it promotethe efficiency of commercial banks and increase the development of its financialsystem, but also can it provide a reference to Chinese interest rate liberalization on thebase of analyzing which factors can affect the NIM during2002to2011.This paper mainly selects indicators on basis of the theoretical models proposedby Maudos and Solis(2009).On the base of the unbalanced panel data of22licensedbanks in HK from2002to2011,this paper analyzes the determinants of the bank NIMthrough static and dynamic econometric methods. The result showed that banks’ NIMhad no lagged effect which meant prior NIM took no effect on later period. Thedeterminants of the NIM are as follows: Average Operating Cost, IntermediaryBusiness, Management Efficiency, Risk Aversion, Default Risk and MarketConcentration. The most significant economic impact on NIM is determined byAverage Operating Cost and Intermediary Business. Average Operating Cost andmarket concentration have significant positive effect on NIM. However managementefficiency, risk aversion, intermediary business and default risk have negative effecton NIM. The symbol of the loan scale is not same as expected.Finally the paper gave some policy suggestion to both HK and China accordingto the test result and pointed out the weakness of this paper and the research directionin the future.