Interest rate spreads in Estonia: different stories for different types of loan

The paper studies the determinants of the interest rate spreads in Estonia, a country that stands out among European countries for its wide spreads. Four distinct credit markets are considered for housing loans, consumer loans, long-term corporate loans and short-term corporate loans. The paper uses quarterly panel data from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed spread into a component determined by the bank-specific factors and a component determined by the market-specific factors, which is labelled in the literature as the pure spread. For each of the two components, the paper finds substantial differences in the determinants of the spreads across different types of loan. While credit risk is important for long-term corporate and housing loans, operating costs are significant in the segment of short-term loans. Similarities found between the loan markets were that the pure spreads are found to be related to the business cycle and market concentration, while the relationship with interest rate risk is found to be insignificant.