Interest spreads in banking in Colombia, 1974-96

This paper examines the determinants of the high intermediation spread observed in the Colombian banking sector for over two decades. A reduced form equation is estimated on the basis of a bank profit maximization model that permits a decomposition into operational costs, financial taxation, market power, and loan quality. Although the average spread did not change between the preliberalization (1974-88) and postliberalization (1991-96) periods, its composition did, with market power being significantly reduced and the responsiveness to loan quality increased. (DSE/DÜI)