The impact of IAS and Basel II Regulations on net interest margin: evidence from Italy

The paper examines the impact of the costs of complying with IAS and Basel II regulations on the net interest margin and operating costs of Italian banks using bank level data for the period 2001-2007. More specifically, the paper intends to ascertain whether: a) IAS and Basel II compliance costs have increased operating costs and have been incorporated in a larger spread; b) there is the presence of scale diseconomies related to compliance costs for Italian mutual banks. An empirical analysis demonstrates that compliance costs have indeed affected operating costs and net interest margin although mutual banks do not face a higher average cost of complying with IAS and Basel II regulation, thanks to the presence of the mutual bank network which enables them to exploit economies of scale. Moreover, empirical findings show that mergers among banks can increase the impact of regulatory costs on net interest margin. These findings remain unchanged even if they are checked for individual bank characteristics represented by labor productivity, size, credit quality, loans, net fee income margin and equity. High net interest margin and operating costs tend to be associated with banks with low productivity that concentrate on traditional lending business, with high credit risk and relatively high equity.