Competition, efficiency and interest rate margins in Latin American banking

High interest rate spreads and low credit availability to the private sector have been persistent problems in Latin American banking in spite of the recent financial sector reforms. This paper considers the determinants of interest rate margins focusing on their relationship with structural and non-structural measures of competition and non-parametric estimates of efficiency. In the empirical analysis we revisit the traditional Structure–Conduct–Performance paradigm and we estimate panel regressions using a Generalized Method of Moments (GMM) framework, for a sample of over 1700 bank observations covering the period 1999–2006. The results show that the concentration index and the market share have little or no influence on interest rate margins. In contrast, we produce evidence suggesting that greater efficiency and competitive markets result in lower spreads. Moreover, while a higher proportion of loans over assets seem to be associated with high spreads, economic growth appears to reduce them.