Forum on the Future of the Caribbean

UWI, St. Augustine ,Trinidad May 5-7, 2015

Bank Spreads in the Caribbean and Latin American

Dorian M. Noel

(Presenter) The University of the West Indies, St. Augustine, Trinidad dorian.noel@sta.uwi.edu

Anthony Birchwood

The University of the West Indies, St. Augustine, Trinidad

May 5

th

, 2015

Michael Brei ( Corresponding Author ) University Paris Ouest michael.brei@uni-bonn.de

 Motivations  Data and Empirical Methodology  Empirical Results  Conclusions

Agenda Pages

3-4 5-13 14-16 17-18 2 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

3 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Motivations

Rationale

 Over the last decades, many developing countries have liberalised the their banking sector in order to, inter alia, o improve the efficiency (pricing and operational) and growth potential of the financial sector, a critical sector of economic growth o reduce the increasing economic costs associated financial repression as a result of the pressures of globalisation  This policy shift led to important changes in the financial landscape o banks now faced increasing international competition – adversely impacted on main revenue generator that is, net interest arte income (interest rate spread)  We

study the behaviour of loan-deposit spreads in the Caribbean and Latin America countries

for the period 1998-2012 4 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Data and Empirical Methodology

5 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Bank-level Data

 Sampled bank-level consolidated financial statement period 1998-2012 from: data for the o BankScope, a commercial database maintained by International Bank Credit Analysis Ltd (IBCA) o Bureau van Dijk  We consider active banking institutions database and located in 27 jurisdictions that are registered in the o 19 Caribbean and 8 Latin America countries o include both domestic banks and subsidiaries of foreign banks  Final sample: o 314 active banks with a total of $47 billion on their balance sheets corresponding to a weighted average of 12 percent of the countries’ GDP (as at end of 2012) 6 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Summary Statistics by Regions

Figure 1: Loan, Deposit and Inflation Rates Caribbean Countries Latin American Countries

7 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Summary Statistics by Regions

Figure 1: Loan, Deposit and Inflation Rates, cont’d Euro Area North America

8 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Summary Statistics by Regions

Figure 1: Loan, Deposit and Inflation Rates, cont’d Non-Euro Area Asia

9 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Loan-Deposit Spread by Regions

Figure 2: Loan-Deposit Spread Caribbean Countries Latin American Countries

10 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Loan-Deposit Spread by Regions , cont’d

Figure 2: Loan-Deposit Spread, cont’d Euro Area North America

11 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Loan-Deposit Spread by Regions , cont’d

Figure 2: Loan-Deposit Spread, cont’d Non-Euro Area Asia-Pacific

12 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Empirical Methodology

  We examine the determinants of interest rate spreads controlling for differences in the macroeconomic and other country-specific factors We employ pooled regression model to estimate the statistical influence of the variables on interest rate spread

Variable

Foreign Crisis Specialisation Loans over total assets Equity over total assets Size Expenses over total assets Liquid assets over total assets NPL over total loans GDP growth Inflation Interest rate 13 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Measurement Unit

Dummy variable Dummy variable Dummy variable Percentage Percentage Natural logarithm, USD Percentage Percentage Percentage Percentage Percentage Percentage

14 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Empirical Results

Empirical Model’s Key Findings

 The major drivers of bank spreads are administrative costs and non-performing loan (statistically speaking)  Bank spreads are positively autocorrelated , which means once spread has increased it’s more likely it would continue to increase  Inflation and interest rates tend to increase bank spreads  The GFC had a positive impact on interest rate spread in the Caribbean region (1.23 to 2.35 percentage points increase) o Also, post-crisis foreign banks’ spread were 0.6 percentage points lower than domestic banks . Pre-crisis, foreign banks’ spreads were roughly 2.28 percentage points higher  An interesting finding is that large foreign banks and those with higher fractions of liquid assets seem to charged higher spreads 15 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Empirical Model’s Key Findings , cont’d

Robustness Tests

 Different definitions of interest rate spread found in the literature o including fees and commissions in the definition of the loan-deposit spread o boarder measure of bank spreads defined as total interests received divided by total interest bearing assets minus total interest expenses divided by total interest bearing liabilities (see Brock and Rojas Suarez, 2000)  We estimate separate models for Caribbean and Latin America countries o Foreign bank spreads were not higher prior to 2009 in the Caribbean o Non-performing loans (a proxy for credit risk) is not major driver of bank spreads in the Caribbean 16 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

17 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Conclusions

Study and It’s Key Findings

 We study the determinant of bank spread in a number Caribbean and Latin American countries for the period 1998-2012  Our results revealed the following: o Spreads are materially higher in this region than other regions of the world o Operating efficiency and non-performing loans are the key factors in explaining spread in the regions o The GFC crisis had a positive impact on spreads in the Caribbean region o With respect to the bank spreads of foreign versus domestic banks, our results are inconclusive.

18 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Q&A

19 2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad

Forum on the Future of the Caribbean

UWI, St. Augustine ,Trinidad May 5-7, 2015

Bank Spreads in the Caribbean and Latin American

Dorian M. Noel

(Presenter) The University of the West Indies, St. Augustine, Trinidad dorian.noel@sta.uwi.edu

Anthony Birchwood

The University of the West Indies, St. Augustine, Trinidad

May 5

th

, 2015

Michael Brei ( Corresponding Author ) University Paris Ouest michael.brei@uni-bonn.de