Macroeconomics of bank interest spreads: evidence from Brazil

Abstract

Bank interest spreads, defined as the difference between lending and deposit rates, average about 30 percentage points in Brazil. This figure is ten times larger than the average in industrial countries and three times larger than the Latin American average. This paper analyzes the causes and macroeconomic consequences of these extraordinarily high spreads. Regarding the causes, I argue that the high spreads can largely be accounted for by a credit program that requires banks to allocate a significant portion of their loans to selected high-risk, high-cost borrowers at below-market interest rates. Banks offset their losses in the selected market by charging a disproportionately higher spread in the nonselected market. I construct a general equilibrium model tailored to evaluate the positive and normative consequences of this policy on the Brazilian economy. I find that the pure cross-subsidy between bank borrowers accounts for about a half of the spread levels. I also find that eliminating this policy distortion would raise GDP by 8 percent and almost double the bank credit in the long-run.JEL Codes: E44, G21, O16.

Corporate Hedging, Investment and Value

“…The spread between the lending and deposit rates, a measure of efficiency and competition in the banking market, has averaged about 30% in Brazil. This is about ten times higher than the average spread in developed countries and about three times higher than the average spread in Latin American countries (Sobrinho (2007)). As a consequence, the nominal interest rate charged to commercial borrowers has remained high as compared to other countries.…”

“…Nakane, Afanasieff and Lhacer (2002) and Gelos (2006) point to a government subsidy to poorly performing sectors of the economy, high default rates on corporate loans, high operating costs of banks, and onerous reserve requirements in addition to overall macroeconomic instability. Sobrinho (2007) shows that a government policy requiring banks to make unprofitable loans to selected riskier borrowers leads to disproportionately higher rates on the other loans. Belaisch (2003) Gelos (2006) shows that on average the bank credit-to-GDP ratio was less than 30% in Brazil in 2003, compared to about 60% for Chile and the U.S.…”

The effects of credit subsidies on development

“…It is important to notice that BNDES has no branches, and it provides credit mostly through commercial and regional development banks, 16 which can access BNDES resources under lower rates and offer credit to firms. The final interest rate in BNDES credit lines contains also an interest rate spread charged by BNDES of about 1.73 percentage points in -2010(Average value. See BNDES, 2010 and the financial intermediaries spread 17 Therefore, we assume that BNDES provide at an annualized rate a 4.3 percentage points subsidy on loan interest rates, such that τ c = 0.2343.…”

“…24 Notice that the level of subsidized loans will affect the total spread as reported by Souza-Sobrinho (2010). In the baseline economy the total spread in non-subsidized loans is equal to 13.08 percent per year, 25 while subsidized loans have no spread relatively to the deposit rate.…”

Corporate Hedging, Investment and Value

“…Nakane, Afanasieff and Lhacer (2002) and Gelos (2006) point to a government subsidy to poorly performing sectors of the economy, high default rates on corporate loans, high operating costs of banks, and onerous reserve requirements in addition to overall macroeconomic instability. Sobrinho (2007) shows that a government policy requiring banks to make unprofitable loans to selected riskier borrowers leads to disproportionately higher rates on the other loans. Belaisch (2003) Overall, during the period of our study, the Brazilian economy passed through an extremely turbulent phase.…”