The Intermediation Spread in Colombian Banks

Posted: 14 Aug 1997

See all articles by Roberto Stein

Roberto Stein

Universidad de los Andes, Colombia - Department of Economics

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Natalia Salazar


Date Written: March 1997


After several decades of financial repression with some partial attempts at liberalization, Colombian policymakers set out to complete the liberalization process in the early nineties, reducing financial taxation, freeing interest rates, facilitating entry/exit, and eliminating capital account restrictions. As this was expected to increase efficiency and competitiveness of financial intermediation, an implicit objective was to reduce interest rate spreads, historically high by international standards. We estimate a profit maximization model using panel data on 22 Colombian banks with monthly observations during 1992-96 to analyze the determinants of the spread between loan and deposit rates. The average spread has been around 20-30 percentage points, 1/3 of which was explained by costs (resource plus financial taxation costs), another 1/3 by credit risk, and the remaining 1/3 by lack of competition or market power. With respect to market power, ownership was an important factor; while private banks exhibited significant market power, charging a markup of about 20% over marginal costs, state banks=B9 spreads were indistinguishable from marginal costs. With respect to costs, retail and state banks tended to have higher marginal costs by 4 and 9 percentage points respectively. A continuous decline in spreads was explained primarily by a reduction in financial taxation, since no significant gains in competition or efficiency occurred. Finally, bivariate tests suggested that banks exert their market power on the loan side, where competition from other types of financial institutions has not been as great.

JEL Classification: E40

Suggested Citation

Stein, Roberto and Barajas, Adolfo and Salazar, Natalia, The Intermediation Spread in Colombian Banks (March 1997). Available at SSRN:

Roberto Stein

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
+571 341 2240 (Phone)
+571 281 5771 (Fax)

Adolfo Barajas (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Natalia Salazar

Fedesarrollo ( email )

Calle 78 No 9-91
Santafe de Bogota, 75074
(571) 334-9912 (Phone)

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