Understanding the Behavior of Bank Spreads in Latin America

22 Pages Posted: 4 Feb 2015

Date Written: 2000

Abstract

Over the last decade, many countries in Latin America have eliminated interest rate ceilings, reduced reserve requirements, and stopped direct credit controls. These market-oriented reforms have encouraged financial deepening, thereby producing considerable economic benefits to the countries. Nevertheless, the persistence of high interest rate spreads has been a disquieting outcome of the reforms. This paper explores the determinants of bank spreads in a systematic way for Argentina, Bolivia, Chile, Colombia, Mexico, Peru, and Uruguay during the mid-1990s. The analysis shows that high operating costs raise spreads as do high levels of non-performing loans, although the size of these effects differs across the countries. In addition, reserve requirements in a number of countries still act as a tax on banks that gets translated into a higher spread. Beyond bank specific variables, uncertainty in the macroeconomic environment facing banks appears to increase interest spreads. The combination of these microeconomic and macroeconomic factors is a cause for concern in Latin America. As spreads widen, the cost of using the financial system becomes prohibitive to some potential borrowers. In addition, the results suggest that bank capital requirements may not prevent excessive risk taking by banks when bank spreads are high.

Keywords: Banks, Interest Rates, Spreads

Suggested Citation

Brock, Philip and Rojas-Suarez, Liliana, Understanding the Behavior of Bank Spreads in Latin America (2000). Journal of Development Economics, Vol. 63, 2000, Available at SSRN: https://ssrn.com/abstract=2559970

Philip Brock

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Liliana Rojas-Suarez (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

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