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Bank interest margins and regulation in Central America and the Caribbean

Author

Listed:
  • Anthony Birchwood
  • Michael Brei

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Dorian Noel

Abstract

This paper examines empirically the determinants of bank interest margins in Central America and the Caribbean over the period 1998-2014. A particular focus is set on the impact of differences in the regulatory environment and market structure across countries in explaining the interest margins of individual banks. Our results suggest that bank market power, cost inefficiency, credit risk, liquid asset holdings, and interest rate risk increase the margin between loan and deposit rates, while increased income diversification and GDP growth are associated with lower loan-deposit spreads. When considering information on banking regulation, we find strong evidence to support our main hypothesis that improvements in market quality and liberalization have a significant effect on interest margins. More specifically, reductions in entry requirements to banking, higher involvement of foreign banks, and increased financial statement transparency are associated with significant reductions in interest margins.

Suggested Citation

  • Anthony Birchwood & Michael Brei & Dorian Noel, 2016. "Bank interest margins and regulation in Central America and the Caribbean," Working Papers hal-04141575, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141575
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141575
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