Interest Spreads in Banking: Costs, Financial Taxation, Market Power, and Loan Quality in the Colombian Case 1974–96

Author/Editor:

Adolfo Barajas ; Natalia Salazar ; Roberto Steiner

Publication Date:

August 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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 pre liberalization (1974-88) and post liberalization (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.

Series:

Working Paper No. 1998/110

Subject:

Banking Commercial banks Deposit rates Financial institutions Financial services Loans Nonperforming loans State-owned banks

English

Publication Date:

August 1, 1998

ISBN/ISSN:

9781451853315/1018-5941

Stock No:

WPIEA1101998

Pages:

46

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