The Margin of Financial Intermediation in Colombia

Posted: 21 Jul 1998

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

Fedesarrollo

Abstract

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. Both state and private banks are examined. 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: N46

Suggested Citation

Stein, Roberto and Barajas, Adolfo and Salazar, Natalia, The Margin of Financial Intermediation in Colombia. Available at SSRN: https://ssrn.com/abstract=37897

Roberto Stein

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

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia
+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
Colombia
(571) 334-9912 (Phone)

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