TAILIEUCHUNG - DETERMINANTS OF INTEREST RATE SPREADS IN BELIZE

Before moving on to the summary analysis of the stylised facts, it is useful to look at the discussion on the European fiscal framework and the events taking place in 2002 through the lenses of capital markets. This is done in this sub-section in order to identify some working hypotheses on the reaction of capital markets to the discussion on the Stability and Growth Pact. Therefore we screened the weekly notes and newsletters of four major investment banks for 2002. 4 First, all policy events mentioned above were reported and discussed in some of the regular newsletters. The more important events, such as the early warning and the developments. | CENTRAL BANK OF BELIZE1 Research Department DETERMINANTS OF INTEREST RATE SPREADS IN BELIZE Prepared by Paula Perez July 2011 Abstract This paper examines the components of interest rate spreads in Belize using accounting data and then seeks to identify the factors that affect interest rate spreads using a panel dynamic least squares model. The study concludes that market share and adversely classified loans are two main determinants of the spread. Based on these findings the study suggests policy recommendations to reduce information asymmetries and increase competition in the Belizean financial sector. JEL codes E43 C33 Keyword Belize interest rate spreads panel dynamic least squares 1 The views expressed are those of the author and do not necessarily represent those of the Central Bank of Belize. 1 Introduction In the latter part of 2008 the first wave of the global financial economic crisis was manifested through a slowdown in the real economy with vulnerable sectors such tourism being severely affected. These external shocks led to a rise in unemployment from in 2008 to in 2009 as businesses tried to compensate for the loss in revenue by reducing business hours and maintaining minimal staff. Eventually adversely classified loans in the commercial banking system spiked from at the end of 2007 to in 2008. Notwithstanding the external macroeconomic environment public sentiment identified exorbitant lending rates as the major obstacle hampering private sector growth and inhibiting their ability to recover. Lending rates are made up of two components deposit rates and the interest rate spread. While high interest rates have been suggested as a significant deterrent to a thriving entrepreneurial sector in Belize empirical work on interest rate spreads is limited. The purpose of this paper is to identify the factors which sustain the interest rate spread in Belize and quantify the effects of these determinants using accounting and econometric

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