THE EFFICIENCY‐STABILITY TRADE‐OFF: THE CASE OF HIGH INTEREST RATE SPREADS IN VENEZUELA

Leonardo Vera, Luis Zambrano‐sequín and Andreas Faust

The Developing Economies, 2007, vol. 45, issue 1, 1-26

Abstract: This paper examines the determinants of the high intermediation spread observed in the Venezuelan banking sector during the 1990s (by far the largest in the Latin American region throughout the 1990s). We trace the evolution of the spread and its connection with other bank‐specific variables. A reduced‐form equation is estimated on the basis of a simple behavioral model for the banking firm previously developed by Shaffer and extended by Barajas, Steiner, and Salazar. Using different types of estimators for aggregate and pooled data of the financial system, we found that high spreads can be attributed to market power, high operating costs, and expected portfolio risk. The empirical results also suggest a trade‐off between assuring bank solvency and lowering profitability.

Date: 2007
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