High Greek bank net interest margins, recapitalisations and competition

This study examines the factors underlying the notably high Greek bank net interest margins compared to the euro-area average, with a particular focus on the interplay between bank competition and recapitalisations. Employing dynamic panel analysis from the early 2000s to 2021, we address potential endogeneity concerns and heterogeneity considerations. Additionally, we utilise local projections impulse response functions to account for structural shifts within the Greek banking landscape. Our findings reveal that diminished bank competition has played a significant role in driving up net interest margins in Greece. Intriguingly, the impact of Greek recapitalisations, in parallel with market conditions characterised by a low level of bank competition, has further contributed to high net interest margins. Supported by evidence from local projections impulse response functions, our study emphasises the necessity of accelerating the banking union and implementing a common regulatory framework across the euro-area. Setting caps on bank interest margins and fees could be a sensible practical recommendation. Such measures are crucial for fostering a more competitive banking environment and mitigating the persistently high net interest margins observed in the Greek banking industry.