WHAT IS IMPEDING GROWTH IN BRAZIL?
deposit rate—have remained fairly stable, around 25 percent. Figure 3.13 compares Brazil’s extremely high ex post real spreads with those from other countries in Latin America and the Caribbean. According to World Bank (2006), banking spreads are high mainly because the domestic money market rate is high and its effect on the lending rate is more than proportional. 48 However, a regression analysis shows that such an explanation is misleading.49 A simple regression of the spreads on the SELIC for data from November 2001 to May 2007 yields the result:50 Real_spread = 22.70 + 0.14 Real_SELIC (0.46) (0.03) R-squared = 0.14 While this regression confirms that the spread and the money market rate are indeed systematically—and positively—related, the large constant term and the R 2 both suggest that the key is elsewhere. Our analysis concludes that the explanation of these high spreads is a combination of factors that include lack of competition and low efficiency, as well as weak information and enforcement of creditor rights (see working paper for details). In summary, financing costs can be extremely high in Brazil for certain segments of firms. The high lending rates observed in commercial banks are mainly driven by a high intermediation spread in the banking system that can be traced to microeconomic distortions and institutional weaknesses more than macroeconomic circumstances.
48
There are many potential explanations for why a higher money market interest rate could have an impact on spreads. For example, higher lending rates induce an adverse selection problem. In turn, a higher proportion of risky loans will result in a larger risk premium, which is reflected in the spread. 49
The authors thank Peter Montiel for this observation.
50
Standard errors are in parenthesis.
155