Determinants of bank interest spread in Estonia

Kadri Männasoo ()

No wp2012-1, Bank of Estonia Working Papers from Bank of Estonia

Abstract: The recent global financial turmoil increased bank interest spreads in Estonia to the highest levels recorded since the Russian crisis in 1998- 1999. The pure spread concept and the two-step estimation approach of Ho and Saunders (1981) have been used to decompose the interest spreads in Estonia. The pure spread is mainly determined by risk aversion and the market structure of the banking sector, with money market interest volatility playing quite a modest role in the long-term equilibrium. The regulatory, efficiency and bank-portfolio effects share a roughly equal weight in the observed spread, whereas credit risk adds only a tiny portion to the mark-up. Strong liquidity and foreign capital permit lower spreads

Keywords: bank interest spread; dealership model (search for similar items in EconPapers)
JEL-codes: E43 G21 (search for similar items in EconPapers)
Date: 2012-02-22, Revised 2012-02-22
New Economics Papers: this item is included in nep-tra
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Citations: View citations in EconPapers (2)

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