Forum on the Future of the Caribbean UWI, St. Augustine,Trinidad May 5-7, 2015 Dorian M. Noel...

Forum on the Future of the Caribbean

UWI, St. Augustine ,TrinidadMay 5-7, 2015

Dorian M. Noel (Presenter) The University of the West Indies, St. Augustine, [email protected]

Anthony BirchwoodThe University of the West Indies, St. Augustine, Trinidad

May 5th, 2015

Bank Spreads in the Caribbean and Latin American

Michael Brei (Corresponding Author) University Paris [email protected]

mailto:[email protected]


2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad2

Agenda

Pages Motivations 3-4

Data and Empirical Methodology 5-13

Empirical Results 14-16

Conclusions 17-18


Motivations


Rationale

Over the last decades, many developing countries have liberalised the their banking sector in order to, inter alia,

o improve the efficiency (pricing and operational) and growth potential of the financial sector, a critical sector of economic growth

o reduce the increasing economic costs associated financial repression as a result of the pressures of globalisation

This policy shift led to important changes in the financial landscape

o banks now faced increasing international competition

– adversely impacted on main revenue generator that is, net interest arte income (interest rate spread)

We study the behaviour of loan-deposit spreads in the Caribbean and Latin America countries for the period 1998-2012


Data and Empirical Methodology


Bank-level Data

Sampled bank-level consolidated financial statement data for the period 1998-2012 from:

o BankScope, a commercial database maintained by International Bank Credit Analysis Ltd (IBCA)

o Bureau van Dijk

We consider active banking institutions that are registered in the database and located in 27 jurisdictions

o 19 Caribbean and 8 Latin America countries

o include both domestic banks and subsidiaries of foreign banks

Final sample:

o 314 active banks with a total of $47 billion on their balance sheets corresponding to a weighted average of 12 percent of the countries’ GDP (as at end of 2012)


Summary Statistics by Regions

Figure 1: Loan, Deposit and Inflation Rates

Caribbean Countries Latin American Countries



Figure 1: Loan, Deposit and Inflation Rates, cont’d

Euro Area North America



Figure 1: Loan, Deposit and Inflation Rates, cont’d

Non-Euro Area Asia


Loan-Deposit Spread by Regions

Figure 2: Loan-Deposit Spread

Caribbean Countries Latin American Countries


Loan-Deposit Spread by Regions, cont’d

Figure 2: Loan-Deposit Spread, cont’d

Euro Area North America


Loan-Deposit Spread by Regions, cont’d

Figure 2: Loan-Deposit Spread, cont’d

Non-Euro Area Asia-Pacific


Empirical Methodology

We examine the determinants of interest rate spreads controlling for differences in the macroeconomic and other country-specific factors

We employ pooled regression model to estimate the statistical influence of the variables on interest rate spread

Variable Measurement Unit

Foreign Dummy variableCrisis Dummy variableSpecialisation Dummy variableLoans over total assets PercentageEquity over total assets PercentageSize Natural logarithm, USDExpenses over total assets PercentageLiquid assets over total assets PercentageNPL over total loans PercentageGDP growth PercentageInflation PercentageInterest rate Percentage


Empirical Results


Empirical Model’s Key Findings

The major drivers of bank spreads are administrative costs and non-performing loan (statistically speaking)

Bank spreads are positively autocorrelated, which means once spread has increased it’s more likely it would continue to increase

Inflation and interest rates tend to increase bank spreads

The GFC had a positive impact on interest rate spread in the Caribbean region (1.23 to 2.35 percentage points increase)

o Also, post-crisis foreign banks’ spread were 0.6 percentage points lower than domestic banks. Pre-crisis, foreign banks’ spreads were roughly 2.28 percentage points higher

An interesting finding is that large foreign banks and those with higher fractions of liquid assets seem to charged higher spreads


Empirical Model’s Key Findings, cont’d

Robustness Tests Different definitions of interest rate spread found in the literature

o including fees and commissions in the definition of the loan-deposit spread

o boarder measure of bank spreads defined as total interests received divided by total interest bearing assets minus total interest expenses divided by total interest bearing liabilities (see Brock and Rojas Suarez, 2000)

We estimate separate models for Caribbean and Latin America countries

o Foreign bank spreads were not higher prior to 2009 in the Caribbean

o Non-performing loans (a proxy for credit risk) is not major driver of bank spreads in the Caribbean


Conclusions


Study and It’s Key Findings

We study the determinant of bank spread in a number Caribbean and Latin American countries for the period 1998-2012

Our results revealed the following:

o Spreads are materially higher in this region than other regions of the world

o Operating efficiency and non-performing loans are the key factors in explaining spread in the regions

o The GFC crisis had a positive impact on spreads in the Caribbean region

o With respect to the bank spreads of foreign versus domestic banks, our results are inconclusive.


Q&A

Forum on the Future of the Caribbean

UWI, St. Augustine ,TrinidadMay 5-7, 2015

Dorian M. Noel (Presenter) The University of the West Indies, St. Augustine, [email protected]

Anthony BirchwoodThe University of the West Indies, St. Augustine, Trinidad

May 5th, 2015

Bank Spreads in the Caribbean and Latin American

Michael Brei (Corresponding Author) University Paris [email protected]



Forum on the Future of the Caribbean UWI, St. Augustine,Trinidad May 5-7, 2015 Dorian M. Noel...

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