Transcript Lecture 1: Course Overview

Forum on the Future of the Caribbean
UWI, St. Augustine ,Trinidad
May 5-7, 2015
Bank Spreads in the Caribbean
and Latin American
May 5th, 2015
Dorian M. Noel (Presenter)
Michael Brei (Corresponding Author)
The University of the West Indies, St. Augustine, Trinidad
[email protected]
University Paris Ouest
[email protected]
Anthony Birchwood
The University of the West Indies, St. Augustine, Trinidad
Agenda
Pages
 Motivations
 Data and Empirical Methodology
2
3-4
5-13
 Empirical Results
14-16
 Conclusions
17-18
2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Motivations
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Rationale
 Over the last decades, many developing countries have liberalised
the their banking sector in order to, inter alia,
o improve the efficiency (pricing and operational) and growth potential
of the financial sector, a critical sector of economic growth
o reduce the increasing economic costs associated financial repression
as a result of the pressures of globalisation
 This policy shift led to important changes in the financial
landscape
o banks now faced increasing international competition
– adversely impacted on main revenue generator that is, net interest arte
income (interest rate spread)
 We study the behaviour of loan-deposit spreads in the
Caribbean and Latin America countries for the period 1998-2012
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Data and Empirical Methodology
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Bank-level Data
 Sampled bank-level consolidated financial statement data for the
period 1998-2012 from:
o BankScope, a commercial database maintained by International Bank
Credit Analysis Ltd (IBCA)
o Bureau van Dijk
 We consider active banking institutions that are registered in the
database and located in 27 jurisdictions
o 19 Caribbean and 8 Latin America countries
o include both domestic banks and subsidiaries of foreign banks
 Final sample:
o 314 active banks with a total of $47 billion on their balance sheets
corresponding to a weighted average of 12 percent of the countries’ GDP
(as at end of 2012)
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Summary Statistics by Regions
Figure 1: Loan, Deposit and Inflation Rates
Caribbean Countries
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Latin American Countries
Summary Statistics by Regions
Figure 1: Loan, Deposit and Inflation Rates, cont’d
Euro Area
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North America
Summary Statistics by Regions
Figure 1: Loan, Deposit and Inflation Rates, cont’d
Non-Euro Area
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Asia
Loan-Deposit Spread by Regions
Figure 2: Loan-Deposit Spread
Caribbean Countries
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Latin American Countries
Loan-Deposit Spread by Regions, cont’d
Figure 2: Loan-Deposit Spread, cont’d
Euro Area
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North America
Loan-Deposit Spread by Regions, cont’d
Figure 2: Loan-Deposit Spread, cont’d
Non-Euro Area
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Asia-Pacific
Empirical Methodology
 We examine the determinants of interest rate spreads controlling for
differences in the macroeconomic and other country-specific factors
 We employ pooled regression model to estimate the statistical
influence of the variables on interest rate spread
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Variable
Measurement Unit
Foreign
Crisis
Specialisation
Loans over total assets
Equity over total assets
Size
Expenses over total assets
Liquid assets over total assets
NPL over total loans
GDP growth
Inflation
Interest rate
Dummy variable
Dummy variable
Dummy variable
Percentage
Percentage
Natural logarithm, USD
Percentage
Percentage
Percentage
Percentage
Percentage
Percentage
2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Empirical Results
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Empirical Model’s Key Findings
 The major drivers of bank spreads are administrative costs and
non-performing loan (statistically speaking)
 Bank spreads are positively autocorrelated, which means once
spread has increased it’s more likely it would continue to increase
 Inflation and interest rates tend to increase bank spreads
 The GFC had a positive impact on interest rate spread in the
Caribbean region (1.23 to 2.35 percentage points increase)
o Also, post-crisis foreign banks’ spread were 0.6 percentage points
lower than domestic banks. Pre-crisis, foreign banks’ spreads were
roughly 2.28 percentage points higher
 An interesting finding is that large foreign banks and those with
higher fractions of liquid assets seem to charged higher spreads
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Empirical Model’s Key Findings, cont’d
Robustness Tests
 Different definitions of interest rate spread found in the literature
o including fees and commissions in the definition of the loan-deposit
spread
o boarder measure of bank spreads defined as total interests received
divided by total interest bearing assets minus total interest expenses
divided by total interest bearing liabilities (see Brock and Rojas Suarez,
2000)
 We estimate separate models for Caribbean and Latin America
countries
o Foreign bank spreads were not higher prior to 2009 in the Caribbean
o Non-performing loans (a proxy for credit risk) is not major driver of
bank spreads in the Caribbean
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Conclusions
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Study and It’s Key Findings
 We study the determinant of bank spread in a number Caribbean
and Latin American countries for the period 1998-2012
 Our results revealed the following:
o Spreads are materially higher in this region than other regions of the
world
o Operating efficiency and non-performing loans are the key factors in
explaining spread in the regions
o The GFC crisis had a positive impact on spreads in the Caribbean
region
o With respect to the bank spreads of foreign versus domestic banks,
our results are inconclusive.
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Q&A
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2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad
Forum on the Future of the Caribbean
UWI, St. Augustine ,Trinidad
May 5-7, 2015
Bank Spreads in the Caribbean
and Latin American
May 5th, 2015
Dorian M. Noel (Presenter)
Michael Brei (Corresponding Author)
The University of the West Indies, St. Augustine, Trinidad
[email protected]
University Paris Ouest
[email protected]
Anthony Birchwood
The University of the West Indies, St. Augustine, Trinidad