Dairo Estrada
destrada@banrep.gov.co

Esteban Gómez
egomezgo@banrep.gov.co

Abstract

This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saunders (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.

Key words:

Interest Margins, Competition, Credit Risk, Interest Rate Risk.

JEL Classification:

L11; L41; L89, G21, G28.

*Head and Economists of the Financial Stability Department, Banco de la República, respectively. The views expressed in this document do not reflect the opinion of the Banco de la República or its Board of Governors. All errors and omissions are our own. We would like to thank Diego Vásquez for econometric assistance and the Financial Stability Staff for insightful discussions.