Changes in Monetary Policy Conduct and Their Effects on Banking Spreads

This paper explores whether monetary policy and the denomination of its operative instrument affects banks’ intermediation spread in the Chilean economy. After dividing the sample into pre- and post nominalization periods, the evidence shows a positive correlation between the monetary policy interest rate and banking spreads before the nominalization period, but loses significance in the post nominalization period. This is true for rises and cuts of the rate, so there is no evidence of asymmetries. Two additional interesting results are that i) the increase in the sector’s market concentration has prompted a reduction in intermediation spreads, and ii) the volatility of the market interest rate, controlling for the year 1998, generates an increase in them. Finally, it is worth noting that the sensitivity of banking spreads to the interest rate variance (that includes exchange rate depreciation and inflation in UF) has increased strongly during the nominalization period.