Intuitively you might expect a more open market to yield lower net interest margins. This post by JP Koning comparing Canada and America suggests that is not always the case.
His post is not long but the short extract below captures the main observation…
It’s true that we have an incredibly concentrated banking sector up here in Canada, with the big 5 controlling an outsized chunk of the market. Paradoxically, this “oligopoly” doesn’t translate into higher net interest margins for Canadian banks. Margins are actually more elevated in the the hotbed of capitalism, the U.S., even though its banks are far more diffused. This margin difference suggests that competition among banks is more strident north of the border than south of it.
Are U.S. banks more competitive than Canadian banks? Moneyness JP Koning, 13 December 2022
Would be interested to read any insights on why this is so. For what it is worth …
- I wonder how much differences in business mix explain the difference in margin. I am not an expert on Canadian banks but my guess is that they have a lot more housing loan exposure than their American counterparts.
- It would also be interesting to see how much of the margin difference translated into a higher or lower return on equity.
Tony – From the Outside
From the outside 
I drew a similar observation a while ago (when comparing US and Asian banks) and was surprised at the higher US NIMs given my assumption that the US was a more competitive market.
I never found a satisfactory answer but did think that it probably related to business mix. I also noticed that US banks tend to hold a higher % of marketable securities that presumably have higher yield and contribute to NIMs – but difficult to generalise.
Economists make a distinction between market concentration and contestability (competitiveness) and it is possible that some concentrated markets (eg. Canadian banking?) don’t necessarily result in ‘excess’ profitability. But the difficult question for me is what is ‘excess’?
The political-social contract with banks is that they support an economy’s growth in credit supply, but the only way to grow balance sheet/RWAs is to increase CET1 capital through consistent and sustainable retained earnings, ie. the Basel framework implies a certain level of profitability for banks to perform their essential function in the economy. But through the cycle, what does that really look like…?
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