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IMF Staff Papers Logo    June 1999
Volume 46, Number 2
 
Interest Spreads in Banking in Colombia, 1974-96
By Adolfo Barajas, Roberto Steiner, and Natalia Salazar

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Abstract: This paper examines the determinants of the high intermediation spread observed in the Colombian banking sector for over two decades. A reduced-form equation is estimated on the basis of a bank profit maximization model that permits a decomposition into operational costs, financial taxation, market power, and loan quality. Although the average spread did not change between the preliberalization (1974-88) and postliberalization (1991-96) periods, its composition did, with market power being significantly reduced and the responsiveness to loan quality increased. Colombia's progress in reducing operational costs and financial taxation and improving loan quality will determine whether it can narrow the spread. [JEL E43, G21, L13]

1999 International Monetary Fund