Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads

In the first seven months of 1995, average bank spreads in Ukraine ranged from 46 percentage points to 84 percentage points. The size of these spreads might suggest that banks enjoyed a wide profit margin. But inflation was high in Ukraine, and i...

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Main Authors:	Montes-Negret, Fernando, Papi, Luca
Format:	Viewpoint
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	BANKS BANKING SYSTEMS INTEREST RATES INTEREST SPREADS INFLATION BREAKEVEN SPREADS ACCOUNTING BALANCE SHEET BANK ASSETS BANK PERFORMANCE BANKING SYSTEM BASLE ACCORD CAPITAL CENTRAL BANK CORPORATE GOVERNANCE DEPOSITS EQUITY FINANCIAL SECTOR DEVELOPMENT GOVERNMENT SUPPORT INCOME LIQUID ASSETS LIQUIDITY MORAL HAZARD NONPERFORMING LOANS OPERATING COSTS PORTFOLIOS PROFITABILITY RESERVE REQUIREMENTS RETURN ON EQUITY TAXATION TRANSITION ECONOMIES
Online Access:	http://documents.worldbank.org/curated/en/1996/02/696758/bank-interest-rate-spreads-too-high-simple-model-decomposing-spreads http://hdl.handle.net/10986/11634

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spelling	okr-10986-116342021-04-23T14:02:56Z Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads Montes-Negret, Fernando Papi, Luca BANKS BANKING SYSTEMS INTEREST RATES INTEREST SPREADS INFLATION BREAKEVEN SPREADS ACCOUNTING BALANCE SHEET BANK ASSETS BANK PERFORMANCE BANKING SYSTEM BANKS BASLE ACCORD CAPITAL CENTRAL BANK CORPORATE GOVERNANCE DEPOSITS EQUITY FINANCIAL SECTOR DEVELOPMENT GOVERNMENT SUPPORT INCOME INFLATION INTEREST RATES LIQUID ASSETS LIQUIDITY MORAL HAZARD NONPERFORMING LOANS OPERATING COSTS PORTFOLIOS PROFITABILITY RESERVE REQUIREMENTS RETURN ON EQUITY TAXATION TRANSITION ECONOMIES In the first seven months of 1995, average bank spreads in Ukraine ranged from 46 percentage points to 84 percentage points. The size of these spreads might suggest that banks enjoyed a wide profit margin. But inflation was high in Ukraine, and its banking system had large stocks of nonperforming loans. Using a simplified model to make a "quick and dirty" estimate of the spread banks need to achieve a positive real return on equity, this Note shows that nominal spreads in Ukraine were, on average, below breakeven. It approaches the question from a methodological perspective, using a highly simplified model and applying international parameters for bank performance as a benchmark. The model is a static one based on quite restrictive assumptions, and it manipulates simple accounting identities without any consideration of the strategic behavior of market participants. But what the model can do is alert policymakers to possibly unsustainable situations and provide estimates of the effects of changes in the policy parameters of the size of the spreads. It can be a handy guide to assess bank spreads for a given bank or banking system anywhere. 2012-08-13T15:35:28Z 2012-08-13T15:35:28Z 1996-02-29 http://documents.worldbank.org/curated/en/1996/02/696758/bank-interest-rate-spreads-too-high-simple-model-decomposing-spreads Viewpoint. -- Note no. 67 (February 1996) http://hdl.handle.net/10986/11634 English Viewpoint CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Viewpoint Publications & Research Europe and Central Asia Ukraine
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	BANKS BANKING SYSTEMS INTEREST RATES INTEREST SPREADS INFLATION BREAKEVEN SPREADS ACCOUNTING BALANCE SHEET BANK ASSETS BANK PERFORMANCE BANKING SYSTEM BANKS BASLE ACCORD CAPITAL CENTRAL BANK CORPORATE GOVERNANCE DEPOSITS EQUITY FINANCIAL SECTOR DEVELOPMENT GOVERNMENT SUPPORT INCOME INFLATION INTEREST RATES LIQUID ASSETS LIQUIDITY MORAL HAZARD NONPERFORMING LOANS OPERATING COSTS PORTFOLIOS PROFITABILITY RESERVE REQUIREMENTS RETURN ON EQUITY TAXATION TRANSITION ECONOMIES
spellingShingle	BANKS BANKING SYSTEMS INTEREST RATES INTEREST SPREADS INFLATION BREAKEVEN SPREADS ACCOUNTING BALANCE SHEET BANK ASSETS BANK PERFORMANCE BANKING SYSTEM BANKS BASLE ACCORD CAPITAL CENTRAL BANK CORPORATE GOVERNANCE DEPOSITS EQUITY FINANCIAL SECTOR DEVELOPMENT GOVERNMENT SUPPORT INCOME INFLATION INTEREST RATES LIQUID ASSETS LIQUIDITY MORAL HAZARD NONPERFORMING LOANS OPERATING COSTS PORTFOLIOS PROFITABILITY RESERVE REQUIREMENTS RETURN ON EQUITY TAXATION TRANSITION ECONOMIES Montes-Negret, Fernando Papi, Luca Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
geographic_facet	Europe and Central Asia Ukraine
relation	Viewpoint
description	In the first seven months of 1995, average bank spreads in Ukraine ranged from 46 percentage points to 84 percentage points. The size of these spreads might suggest that banks enjoyed a wide profit margin. But inflation was high in Ukraine, and its banking system had large stocks of nonperforming loans. Using a simplified model to make a "quick and dirty" estimate of the spread banks need to achieve a positive real return on equity, this Note shows that nominal spreads in Ukraine were, on average, below breakeven. It approaches the question from a methodological perspective, using a highly simplified model and applying international parameters for bank performance as a benchmark. The model is a static one based on quite restrictive assumptions, and it manipulates simple accounting identities without any consideration of the strategic behavior of market participants. But what the model can do is alert policymakers to possibly unsustainable situations and provide estimates of the effects of changes in the policy parameters of the size of the spreads. It can be a handy guide to assess bank spreads for a given bank or banking system anywhere.
format	Publications & Research :: Viewpoint
author	Montes-Negret, Fernando Papi, Luca
author_facet	Montes-Negret, Fernando Papi, Luca
author_sort	Montes-Negret, Fernando
title	Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
title_short	Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
title_full	Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
title_fullStr	Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
title_full_unstemmed	Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads
title_sort	are bank interest rate spreads too high? a simple model for decomposing spreads
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/1996/02/696758/bank-interest-rate-spreads-too-high-simple-model-decomposing-spreads http://hdl.handle.net/10986/11634
_version_	1764417448539324416

Are Bank Interest Rate Spreads Too High? A Simple Model for Decomposing Spreads

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