Abstract

We use a two-stage contingent claim analysis model to study how capital regulation, deposit insurance, involvement in financial electronic commerce (e-commerce), and the optimal bank interest margin relate to one another under an uncertain loan loss source. Under strategic substitutes, both capital regulation and deposit insurance provide incentives for developing financial e-commerce, which helps the bank's growth. Our findings provide alternative explanations for the bank interest margin, which integrates the risk considerations of pricing equity with the bank's involvement in financial e-commerce, and for the asset–liability management rate-setting behavioral modes under capital regulation and deposit insurance.

Author Keywords: Bank interest margin; Financial e-commerce; Capital regulation; Deposit insurance; Black–Scholes valuation

G13; G28