Interest rate spreads and banking system efficiency: General considerations with an application to the transition economies of Central and Eastern Europe

Anna Agapova and James E. McNulty

International Review of Financial Analysis, 2016, vol. 47, issue C, 154-165

Abstract: Low spreads between loan rates and deposit rates are indicative of a more efficient financial system. We argue that spreads are better cross country measures of banking system efficiency than the net interest margins used in previous studies. We present theoretical and empirical evidence that the spread may be a particularly good measure of efficiency, both for the transition economies and other countries. The spread is a financial intermediation measure and is highly negatively correlated with conventional measures of intermediation. Consistent with theory, the spread is negatively related to economic growth. We also find that the spread has determinants similar to other FI measures. International agencies should report spreads and put more emphasis on this measure of efficiency.

Keywords: Financial intermediation; Bank rate spread; Transition economies; Banking efficiency (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:47:y:2016:i:c:p:154-165

DOI: 10.1016/j.irfa.2016.07.004

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