Measuring the Determinants of Average and Marginal Bank Interest Rate Spreads in Chile, 1994-2001
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 dataset that allows us to directly compute interest rate spreads based on individual bank loan and deposit rates reported on a monthly basis to the relevant organization. The information is disaggregated by unit of account (peso,the inflation-indexed UF, 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 aution in interpreting estimated empirical determinants of bank spreads that are constructed from income statements and balance sheet data. At the same time, it 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 is capable of drawing by itself. The results for Chile suggest the potential importance of gathering such disaggregated data in other countries.
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