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Determinants of bank interest spread in Estonia

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  • Kadri Männasoo

Abstract

The recent global financial turmoil increased bank interest spreads in Estonia to the highest levels recorded since the Russian crisis in 1998- 1999. The pure spread concept and the two-step estimation approach of Ho and Saunders (1981) have been used to decompose the interest spreads in Estonia. The pure spread is mainly determined by risk aversion and the market structure of the banking sector, with money market interest volatility playing quite a modest role in the long-term equilibrium. The regulatory, efficiency and bank-portfolio effects share a roughly equal weight in the observed spread, whereas credit risk adds only a tiny portion to the mark-up. Strong liquidity and foreign capital permit lower spreads

Suggested Citation

  • Kadri Männasoo, 2012. "Determinants of bank interest spread in Estonia," Bank of Estonia Working Papers wp2012-1, Bank of Estonia, revised 22 Feb 2012.
    • Handle: RePEc:eea:boewps:wp2012-1
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    File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2012/_wp_112.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Were, Maureen & Wambua, Joseph, 2013. "Assessing the determinants of interest rate spread of commercial banks in Kenya: An empirical investigation," KBA Centre for Research on Financial Markets and Policy Working Paper Series 4, Kenya Bankers Association (KBA).

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    More about this item

    Keywords

    bank interest spread; dealership model;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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