Determinants of Interest Margins in Colombia

This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saun-ders (1981), interest margins are modelled as a function of the pure spread and bank-specific institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly affected by credit institutions' inefficiency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be oriented towards creating the necessary market conditions for banks to enhance their efficiency.

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