Bank interest rates have been the focus of recent (October 1999) policy attention by the Brazilian Central Bank. In a highly publicised report [see Banco Central do Brasil (1999)], this institution showed a great concern for the high levels of the bank loan interest rates observed in the country. This report concluded that high default levels as well as high operating costs are amongst the main culprits for the high bank interest margin seen in the country. On average, loan default and operating cost accounted for 35% and 22% of bank spread, respectively, for a sample of 17 Brazilian banks.
The economic and policy relevance of such topic is beyond any questioning. However, the Central Bank report lacks a more formal approach to support their main conclusions. The decomposition of the bank interest margin among different factors is based on accounting identities rather than on a bank profit maximization model.
The purpose of this paper is to provide an econometric account of the main determinants of the bank interest margin in Brazil. The study makes use of the two-step regression approach advanced by Ho and Saunders (1981) to uncover the influence of bank characteristic variables as well as macroeconomic influences as the main explanatory factors of the bank spread in the country.
The paper is structured as follows: after this Introduction, section 2 reviews the relevant literature. Section 3 overviews the recent behavior of bank interest rates in Brazil. Section 4 describes the methodology to be applied in the paper. Section 5 introduces the empirical model to be estimated. Section 6 deals with the sample and data issues. Section 7 presents the main results. Section 8 summarizes the main findings and concludes the paper.
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