Determinants of Interest Margins in Colombia

Abstract

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-speci¯c 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 a®ected by credit institutions' ine±ciency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be ori- ented towards creating the necessary market conditions for banks to enhance their e±ciency.Interest Margins, Competition, Credit Risk, Interest Rate Risk.