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Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001

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  • Philip Brock
  • Helmut Franken

Abstract

The study of bank interest rate spreads is central to our understanding of the process of financial intermediation. Data limitations generally restrict empirical analyses to interest rate spreads that are constructed from bank income statements and balance sheets. In this paper we make use of a data set that allows us directly to compute interest rate spreads based on individual bank loan and deposit rates reported on a monthly basis to the Central Bank of Chile. The information is disaggregated by unit of account (peso, inflation-indexed, and dollar) over the period 1994-2001. We find that the estimated impacts of industry concentration, business cycle variables, and monetary policy variables differ markedly between interest rate spreads based on balance sheet data and interest rate spreads based on disaggregated loan and deposit data. Since empirical work on interest spreads is used for guiding policy recommendations, these findings have important implications for the interpretation of interest spreads regressions. Our analysis calls for some caution in the interpretation of estimated empirical determinants of bank spreads that are constructed from income statements and balance sheet data. At the same time, our analysis shows how information from the two types of interest rate spreads can be combined to create a more complete portrait of bank behavior than either type alone is capable of creating. The results for Chile suggest the potential importance of gathering such disaggregated data in other countries.

Suggested Citation

  • Philip Brock & Helmut Franken, 2003. "Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001," Working Papers UWEC-2003-25, University of Washington, Department of Economics.
  • Handle: RePEc:udb:wpaper:uwec-2003-25
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    File URL: http://www.econ.washington.edu/user/plbrock/ChileSpreads091603.pdf
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    Cited by:

    1. Roman Horváth, 2009. "The Determinants of the Interest Rate Margins of Czech Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(2), pages 128-136, June.
    2. International Monetary Fund, 2013. "Peru; Selected Issues Paper," IMF Staff Country Reports 13/46, International Monetary Fund.
    3. Hainz, Christa & Horváth, Roman & Hlaváček, Michal, 2014. "The interest rate spreads in the Czech Republic: Different loans, different determinants?," Economic Systems, Elsevier, vol. 38(1), pages 43-54.
    4. Mathur, Ike & Marcelin, Isaac, 2015. "Institutional failure or market failure?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 266-280.
    5. repec:eur:ejmsjr:59 is not listed on IDEAS
    6. Chortareas, Georgios E. & Garza-García, Jesús G. & Girardone, Claudia, 2012. "Competition, efficiency and interest rate margins in Latin American banking," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 93-103.
    7. Horváth, Roman & Podpiera, Anca, 2012. "Heterogeneity in bank pricing policies: The Czech evidence," Economic Systems, Elsevier, vol. 36(1), pages 87-108.
    8. Serhat Yuksel & Sinemis Zengin, 2017. "Influencing Factors of Net Interest Margin in Turkish Banking Sector," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 178-191.
    9. Koffie Ben Nassar & Edder Martinez & Anabel Pineda, 2014. "Determinants of Banks' Net Interest Margins in Honduras," IMF Working Papers 14/163, International Monetary Fund.

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