Publication: Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
Date
1996-02-29
ISSN
Published
1996-02-29
Author(s)
Montes-Negret, Fernando
Papi, Luca
Abstract
In the first seven months of 1995,
average bank spreads in Ukraine ranged from 46 percentage
points to 84 percentage points. The size of these spreads
might suggest that banks enjoyed a wide profit margin. But
inflation was high in Ukraine, and its banking system had
large stocks of nonperforming loans. Using a simplified
model to make a "quick and dirty" estimate of the
spread banks need to achieve a positive real return on
equity, this Note shows that nominal spreads in Ukraine
were, on average, below breakeven. It approaches the
question from a methodological perspective, using a highly
simplified model and applying international parameters for
bank performance as a benchmark. The model is a static one
based on quite restrictive assumptions, and it manipulates
simple accounting identities without any consideration of
the strategic behavior of market participants. But what the
model can do is alert policymakers to possibly unsustainable
situations and provide estimates of the effects of changes
in the policy parameters of the size of the spreads. It can
be a handy guide to assess bank spreads for a given bank or
banking system anywhere.
Citation
“Montes-Negret, Fernando; Papi, Luca. 1996. Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads. Viewpoint. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/7a0625c7-5614-506c-a91a-7aef34d93fc5 License: CC BY 3.0 IGO.”
Report Series
Report Series
Other publications in this report series
-
PublicationInvestment Climate in Africa(World Bank, Washington, DC, 2015-07-01)The World Bank Group has been working on investment climate reform in Sub-Saharan Africa for nearly a decade, a period characterized by dramatic economic growth on the continent. Establishing links between such reform interventions and economic growth, however, is a complex problem. Although this note finds some connection between investment climate reform and economic growth, establishing more concrete evidence of causation will require greater focus at the country level, as well as on small and medium enterprises. This is where investment climate interventions generate change.
-
PublicationExport Competitiveness: Why Domestic Market Competition Matters(World Bank, Washington, DC, 2015-06)This review of the empirical literature shows that industries with more intense domestic competition will export more. Competition law enforcement can be traced to export performance and is complementary to trade reforms. Pro-competition market regulation that reduces restrictions and promotes competition, where it is viable, is an important determinant for trade. The elimination of barriers to entry and rivalry, and a level playing field in upstream sectors contributes to export competitiveness in downstream manufacturing sectors. In some sectors, effective competition policy can directly lower trade costs.
-
PublicationPrimary Care for the Poor: The Potential of Micro-Health Markets to Improve Care( 2015-01)Much of the primary curative care provided to the poor by the private sector occurs not at large hospitals but at small, single-person clinics. While such micro-health providers increase access, questions persist about quality. Some have argued that the micro-health sector needs to be better regulated. This note cites recent studies in arguing that the micro-health sector needs to be better understood. A more evidence based approach may enable the World Bank Group to better target investments and interventions and help these providers fulfill an important role serving the poor. The following recommendations are made at the conclusion of this paper: (1) Effort, rather than hardware or training, may count the most. (2) Scaling up interventions to improve quality requires understanding and addressing market failures. (3) Changing the way impacts are measured will lead to smarter investments.
-
PublicationSmall Business Tax Regimes(World Bank, Washington, DC, 2016-02)Simplified tax regimes for micro and small enterprises in developing countries are intended to facilitate voluntary tax compliance. However, survey evidence suggests that small business taxation based on simplified bookkeeping or turnover is sometimes perceived as too complex for microenterprises in countries with high illiteracy levels. Very simple fixed tax regimes not requiring any books or records tend to be overly popular but prone to abuse. System reforms will require more precise tailoring of the simplified regimes to their target beneficiaries, coupled with strong compliance management to detect and deter abuse. The overall objective of simplified taxation for micro and small enterprises (MSEs) in developing countries is generally to facilitate voluntary tax compliance and remove obstacles in moving toward business formalization and growth.
-
PublicationCompetition and Poverty(World Bank, Washington, DC, 2016-04)A literature review shows competition policy reforms can deliver benefits for the poorest households and improve income distribution. A lack of competition in food markets hurts the poorest households the most. Competition in input markets and between buyers helps farmers and small businesses. And more competitive markets bolster job growth over the longer term. More research is needed, however, to better understand the impact of competition reforms and antitrust enforcement on poverty and shared prosperity.