Brazil's Bank Spread in International Context : From Macro to Micro Drivers

Brazil's Bank Spread in International Context : From Macro to Micro Drivers

In an international context, this paper analyzes the main drivers of Brazil's bank spreads measured by the net interest margin, by estimating internationally comparable measures for (i) institutional and regulatory (micro-) factors; (ii) macro...

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Bibliographic Details
Main Authors:	Jorgensen, Ole Hagen, Apostolou, Apostolos
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ACCOUNTING ADMINISTRATIVE COSTS ARBITRAGE ASSET RATIO ASSET RATIOS BALANCE SHEETS BANK BORROWERS BANK BRANCHES BANK CAPITAL BANK CHARGES BANK COMPETITION BANK INTEREST MARGINS BANK INTEREST RATE BANK LENDING BANK MANAGEMENT BANK MARGINS BANK MARKET BANK POLICY BANK REGULATION BANK REGULATIONS BANK SPREAD BANK SPREADS BANK SUPERVISION BANKING ASSETS BANKING MARKET BANKING SECTOR BANKING SECTORS BANKING SERVICES BANKING SYSTEM BANKING SYSTEMS BANKS BOND BOND INDEXES BOND SPREAD BOND SPREADS BOND YIELD BONDS BORROWER BORROWING CAPITAL ALLOCATION CAPITAL ASSET CAPITAL OUTFLOWS CAPITAL RATIO CAPITAL RATIOS CAPITAL REQUIREMENTS CENTRAL BANK CERTIFICATES OF DEPOSITS CHECKS COLLATERAL COMMERCIAL BANK COMMERCIAL BANKS COMMODITY COMMODITY PRICES COST OF CAPITAL COST TO BORROWERS COUNTRY COMPARISONS COUNTRY RISK CREDIT GUARANTEE CREDIT MARKET CREDIT PORTFOLIOS CREDIT RATINGS CREDIT RISK CREDIT RISK EXPOSURE CREDIT SPREAD CREDIT WORTHINESS CREDITOR DEBT DEBTS DEFAULT RATES DEFAULT RISK DEFAULTS DEGREE OF RISK DEPOSIT DEPOSIT INSURANCE DEPOSIT INTEREST DEPOSIT INTEREST RATES DEPOSIT RATE DEPOSIT RATES DEPOSITORS DEPOSITS DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT BANK DIRECT CREDIT DOMESTIC BANKING DOMESTIC BANKING MARKETS DOMESTIC BANKS EARNING ASSETS EARNINGS ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC POLICIES ECONOMIC POLICY ECONOMIC RISK ECONOMIES IN TRANSITION EMERGING MARKET EMERGING MARKET BOND EMERGING MARKET COUNTRIES EMERGING MARKETS EXPENDITURES FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL DEEPENING FINANCIAL DEVELOPMENT FINANCIAL INTERMEDIATION FINANCIAL MARKET FINANCIAL MARKET DEVELOPMENT FINANCIAL REGULATIONS FINANCIAL SECTOR FINANCIAL SECTOR REGULATIONS FINANCIAL SERVICES FINANCIAL STABILITY FINANCIAL STATEMENTS FINANCIAL SYSTEM FINANCIAL SYSTEMS FIXED RATE FLOATING RATES FLOW OF CREDIT FOREIGN BANK FOREIGN BANK PARTICIPATION FOREIGN ENTRY GLOBAL FINANCIAL SYSTEM GOVERNMENT BONDS GROSS DOMESTIC PRODUCT GROWTH RATE GROWTH RATES GUARANTEE FUND HIGH INTEREST RATES HOLDING HOLDINGS IMPLICIT INTEREST INCOME STATEMENTS INFLATION INFLATION RATE INTEREST EXPENSE INTEREST PAYMENTS INTEREST RATE INTEREST RATE CEILINGS INTEREST RATE RISK INTEREST RATE SPREAD INTEREST RATE SPREADS INTEREST RATES INTEREST-RATE RISK INTERMEDIATION SPREADS INTERNATIONAL ACCOUNTING STANDARDS INTERNATIONAL BANK INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL STANDARDS INVESTMENT BANKING INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES LACK OF COMPETITION LESS DEVELOPED MARKETS LIABILITY LIABILITY SIDE LOAN LOAN RATE LOAN RATES MACROECONOMIC ENVIRONMENT MACROECONOMIC RISK MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MACROECONOMICS MARGINAL COSTS MARKET COMPETITION MARKET CONCENTRATION MARKET DEVELOPMENT MARKET PRICES MARKET STRUCTURE MATURITIES MATURITY MONETARY AUTHORITIES MONETARY FUND MONETARY POLICY MONOPOLISTIC BEHAVIOR MONOPOLY MORTGAGES NET INTEREST MARGIN NET MARGIN NON-PERFORMING LOANS OFF BALANCE SHEET OPERATING COSTS OPERATING EXPENSES OPERATING INCOME OPPORTUNITY COST OUTPUT OVERHEAD COSTS PORTFOLIOS PRIME RATES PROBABILITY OF DEFAULT PROFITABILITY RECESSIONS REGULATORY RESTRICTIONS REGULATORY STANDARDS REPAYMENTS RESERVE RESERVE REQUIREMENTS RESERVES RETURN RETURNS RISK AVERSION RISK EXPOSURE RISK FACTORS RISK NEUTRAL RISK PREMIUM SAVINGS SHORT TERM INTEREST RATES SOCIAL WELFARE SOVEREIGN RATINGS STOCK RETURNS STRUCTURAL PROBLEM SUPERVISION OF BANKS TAX TAXATION TRADING TRANSACTION TRANSACTION COSTS UNION VALUATION YIELD SPREADS
Online Access:	http://documents.worldbank.org/curated/en/2013/09/18274331/brazils-bank-spread-international-context-macro-micro-drivers http://hdl.handle.net/10986/16839

Description
Summary:	In an international context, this paper analyzes the main drivers of Brazil's bank spreads measured by the net interest margin, by estimating internationally comparable measures for (i) institutional and regulatory (micro-) factors; (ii) macro-economic factors; and (iii) banking competition factors. The paper produces and applies a novel data set covering 197 areas and countries; ranging from 1995 to 2009, including 106 banks for Brazil and 16,434 banks worldwide. The analysis finds that micro-factors are the main drivers of spreads across the world. In the case of Brazil, the spread is found to be strongly accounted for by micro-factors -- also in international comparison. For example, micro-factors contributed 7.2 percentage points (79 percent) of the 11.5 percent total spread in Brazil in 2009, while macro-factors and banking competition factors jointly accounted for only 1.9 percentage points (21 percent). Conversely, Brazil does not rank high in international comparison in terms of macro-economic risk: Brazil and other countries from Latin America and the Caribbean are found to feature the highest micro-factors in the world while having the second-highest spreads and the second-lowest contribution of macro-factors. These unique findings suggest that countries striving toward reducing bank spreads should consider policies aimed at reducing microeconomic frictions in their banking sectors, in particular, (i) the economic costs of holding reserves, (ii) credit risk, and (iii) implicit interest payments. In terms of policy dialogue, this would be especially relevant for Brazil and for Latin American and Caribbean countries in general.