Interest Spreads in Banking: Costs, Financial Taxation, Market Power, and Loan Quality in the Colombian Case 1974-96
46 Pages Posted: 15 Feb 2006
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: Suggested Citation
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