We investigate the determinants of net interest margins of Indonesian banks after the 1997/1998 financial crisis. Using data for 93 Indonesian banks over the 2001-2009 period, we estimate an econometric model using a pooled regression as well as static and dynamic panel regressions. Our results confirm that the structure of loan portfolios matters in the determination of interest margins. Operating costs, market power, risk aversion and liquidity risk have positive impacts on interest margins, while credit risk and cost-to-income ratio are negatively associated with margins. Our results also corroborate the loss leader hypothesis on cross-subsidization between traditional interest activities and non-interest activities. State owned banks set higher interest margins than other banks, while margins are lower for large banks and for foreign banks.

It is widely known that the average net interest margin, the difference between interest income and expenses divided by interest-earning assets, of Indonesian banks is relatively higher than those observed in other countries, particularly in the East Asia region (Rosengard and Prasetyantoko, 2011). A number of cross-country studies point out this fact. DemirgüçKunt and Huizinga (1998) show that the average margins of Indonesian banks for the 19881995 periods was 3.6%, higher than those of neighboring countries such as Singapore (2.2%), and Malaysia (2.7%). Using data after the 1997/1998 financial crisis from 1999 to 2008, López-Espinosa et al. (2011) show that, in Indonesia, average bank interest margins (4.85%) were much higher than, for example, the average interest margins of Japanese banks (1.92%). Recently, Lin et al. (2012) have indicated that with a value of 6.36% the average bank margin of Indonesian banks over the 1997-2005 period, was the highest compared to other Asian countries in their sample 2 . Their work also shows that the interest margin of Indonesian banks is significantly higher after the 1997/1998 crisis than before.