THE IMPACT OF STATE OWNED BANKS ON INTEREST RATES SPREAD

Abstract

This paper develops the hypothesis that the co-existence of state owned banks with privately owned banks together tends to raise interest rates spreads and profitability of privately owned banks. This hypothesis can help explain the relationship between the share of state owned banks on total banking assets and economic growth, as reported in the literature. Three empirical tests of the two parts of the main hypothesis are presented. Two of them rely on Brazilian monthly time series data and the other one uses a cross section regression with data for a sample of countries. One of them builds on an estimation of an expanded version of the composition of a rate of return of an asset under the market efficient hypothesis. Another one estimates a factor augmented vector autoregression (FAVAR) model. All of these tests give support to the hypotheses tested.