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Interest margins and bank regulation in Central America and the Caribbean

Anthony Birchwood, Michael Brei and Dorian Noel

No 2016-33, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper examines empirically the determinants of bank interest margins in Central America and the Caribbean over the period 1998-2014. A particular focus is set on the impact of differences in the regulatory environment and market structure across countries in explaining the interest margins of individual banks. Our results suggest that bank market power, cost inefficiency, credit risk, liquid asset holdings, and interest rate risk increase the margin between loan and deposit rates, while increased income diversification and GDP growth are associated with lower loan-deposit spreads. When considering information on banking regulation, we find strong evidence to support our main hypothesis that improvements in market quality and liberalization have a significant effect on interest margins. More specifically, reductions in entry requirements to banking, higher involvement of foreign banks, and increased financial statement transparency are associated with significant reductions in interest margins.

Keywords: Bank margin; bank spread; Central America; Caribbean. (search for similar items in EconPapers)
JEL-codes: G21 L11 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-lam
Date: 2016
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