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

46 Pages Posted: 15 Feb 2006

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Roberto Steiner

Fedesarrollo; Universidad de los Andes, Colombia - Department of Economics

Natalia Salazar

Fedesarrollo

Date Written: August 1998

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 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.

Keywords: Colombia, interest rates, banking system, loan quality

JEL Classification: E43, G21, L13

Suggested Citation

Barajas, Adolfo and Steiner, Roberto and Salazar, Natalia, Interest Spreads in Banking: Costs, Financial Taxation, Market Power, and Loan Quality in the Colombian Case 1974-96 (August 1998). IMF Working Paper No. 98/110, Available at SSRN: https://ssrn.com/abstract=882640

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)

Roberto Steiner

Fedesarrollo ( email )

Calle 78 No 9-91
Santafe de Bogota, 75074
Colombia

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

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Natalia Salazar

Fedesarrollo ( email )

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

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