Determinants of interest margins in Colombia

Abstract

This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saunders (1981), interest margins are modelled as a function of the pure spread and bank-specific institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly affected by credit institutions' inefficiency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be oriented towards creating the necessary market conditions for banks to enhance their efficiency.

Competition, efficiency and interest rate margins in Latin American banking

“…Argentina, Brazil and Chile). Estrada, Gomez, and Orozco (2006) and Gelos (2006) find similar results, implying that more efficient banks tend to have lower interest rate spreads. In contrast, the scale efficiency variable, ESS, appears to be less important in explaining NIM.…”

Financial transaction tax and banking margins: An empirical note for Colombia

“…(3)), as measured by labor costs, matters in spread setting, so that greater inefficiency (higher labor costs) implies setting higher spreads. Findings for control variables included in vector x j confirm what is conventionally recognized by empirical literature: The positive impact of the riskier credits on lending interest rate (and thus on margins) and the use of commissions as a complementary (instead of substitute) source of income for banks (Barajas et al, 1999;Estrada et al, 2006;Galindo & Majnoni, 2006).…”

“…On the other hand, the fees (commissions) charged by intermediaries by the services they provide are also taken into account, since under certain circumstances they could be a source of income that complements or even replaces income from interest on loans. Estrada, González, and Hinojosa (2006) explore the importance of this factor in the margin formation of the Colombian financial system.…”

Determinants of interest rate in emerging markets

“…Though macroeconomic factors such as inflation have been indicated to influence interest rate spreads, their indirect impact on interest rate to an individual bank is scarce. For example, Estrada et al (2006) state that because of the nature of macroeconomic variables, they are general factors not necessarily meant for interest rate fixing but play a general role in shaping the economic environment in which banks operate. As such, their direct inclusion in the determination of individual bank interest rate creates a double effect since changes in the former is always captured in changes in bank-specific factors and industry-specific factors.…”