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.
Link to Data Set
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://hdl.handle.net/10986/11634 License: CC BY 3.0 IGO.”
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