Forum on the Future of the Caribbean UWI, St. Augustine,Trinidad May 5-7, 2015 Dorian M. Noel (Presenter) The University of the West Indies, St. Augustine, Trinidad Anthony Birchwood The University of the West Indies, St. Augustine, Trinidad May 5 th, 2015 Bank Spreads in the Caribbean and Latin American Michael Brei ( Corresponding Author ) University Paris Ouest

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad2 Agenda Pages  Motivations 3-4  Data and Empirical Methodology 5-13  Empirical Results  Conclusions 17-18

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad3 Motivations

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad4 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

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad5 Data and Empirical Methodology

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad6 Bank-level Data  Sampled bank-level consolidated financial statement data for the period from: o BankScope, a commercial database maintained by International Bank Credit Analysis Ltd (IBCA) o Bureau van Dijk  We consider active banking institutions that are registered in the database and located in 27 jurisdictions 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)

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad7 Summary Statistics by Regions Figure 1: Loan, Deposit and Inflation Rates Caribbean Countries Latin American Countries

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad8 Summary Statistics by Regions Figure 1: Loan, Deposit and Inflation Rates, cont’d Euro Area North America

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad9 Summary Statistics by Regions Figure 1: Loan, Deposit and Inflation Rates, cont’d Non-Euro Area Asia

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad10 Loan-Deposit Spread by Regions Figure 2: Loan-Deposit Spread Caribbean Countries Latin American Countries

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad11 Loan-Deposit Spread by Regions, cont’d Figure 2: Loan-Deposit Spread, cont’d Euro Area North America

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad12 Loan-Deposit Spread by Regions, cont’d Figure 2: Loan-Deposit Spread, cont’d Non-Euro Area Asia-Pacific

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad13 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 VariableMeasurement Unit ForeignDummy variable CrisisDummy variable SpecialisationDummy variable Loans over total assetsPercentage Equity over total assetsPercentage SizeNatural logarithm, USD Expenses over total assetsPercentage Liquid assets over total assetsPercentage NPL over total loansPercentage GDP growthPercentage InflationPercentage Interest ratePercentage

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad14 Empirical Results

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad15 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

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad16 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

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad17 Conclusions

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad18 Study and It’s Key Findings  We study the determinant of bank spread in a number Caribbean and Latin American countries for the period  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.

2015 Forum on the Future of the Caribbean, St. Augustine, Trinidad19 Q&A

Forum on the Future of the Caribbean UWI, St. Augustine,Trinidad May 5-7, 2015 Dorian M. Noel (Presenter) The University of the West Indies, St. Augustine, Trinidad Anthony Birchwood The University of the West Indies, St. Augustine, Trinidad May 5 th, 2015 Bank Spreads in the Caribbean and Latin American Michael Brei ( Corresponding Author ) University Paris Ouest