Causality Between Bank Net Interest Margins and Operating Expenses

Net interest income is the most important contributor to bank profitability, with the next most important factor being operating expense levels. If we really want to understand how banks generate their profits, and how to maximise these, we need to look at what they do to generate net interest income, at the factors that impact on net interest income, and at what impacts on their operating expenses. The research reported in this book looks at the relationships between net interest income and banks'' operating expenses of the five major New Zealand banks over the period 1996 to 2002. For most of the banks, it was found that changes in net interest income led to changes in operating expenses, but for one of the banks, the relationships worked in both directions. Since the pioneering study of Ho and Saunders in 1981 (published in the Journal of Financial and Quantitative Analysis), a number of researchers have looked at the relationships between net interest income and operating expense. This is the first study to look at the New Zealand case, and it thus makes a useful contribution to the international research literature.