Using the methodology developed by Saunders and Schumacher (2000) and data from BankScope we are able to consistently measure and compare spreads across countries. We present our findings for 2009 in Table 2, and for 2008 in Annex 2, Table 1. We find that despite the fact the Brazil ranks at the top of table with the highest IFS spreads, it ranks 15<sup>th</sup> in terms of the highest NIM out of 121 countries, 17<sup>th</sup> in terms of I&R factors and 56<sup>th</sup> in terms of macro-factors (Table 2) in 2009. These findings show that Brazil’s intermediation costs are overestimated when simply looking at IFS spreads and arguing that most of Brazil’s spreads are explained by I&R factors.

In 2009, 79 percent of Brazil’s spreads come from I&R factors. Our findings for Brazil are robust, with the R<sup>2</sup> of our regression measuring at 0.76 in 2009. Therefore, the I&R factors for Brazil are very significant in explaining the NIM in 2009. In addition, we find the macro-factors for Brazil, meaning the constant of our regression, to be significant in the 5 percent interval. This points to the robustness of our macro-factors findings and their statistical significance. In terms of I&R factors Brazil ranks 17<sup>th</sup> , much higher than Russia, ranked 49<sup>th</sup> , India, ranked 119<sup>th</sup> , China, ranked 85<sup>th</sup> and the U.S., ranked 107<sup>th</sup> out of 121 countries in 2009.

It is not surprising that in 2009, Brazil ranks 56<sup>th</sup> in terms of spreads attributed to macro-factors, which is lower than the U.S. which ranks 21<sup>st</sup> , Russia that ranks 8<sup>th</sup> , India that ranks 31<sup>st</sup> and only slightly higher than China that ranks 59<sup>th</sup> . These rankings indicate that Brazil’s I&R factors explain most of the total spread (NIM) but are very high compared to other BRICs and the U.S. Therefore, Brazilian authorities should focus on reducing the impact of I&R factors in order to reduce spreads but also to improve the country’s ranking in the global tables of spreads.

Brazil’s IFS spreads are high compared to the rest of the LAC region. Nevertheless, the region has 13 countries in the top 30 with the highest IFS spreads, with Brazil at the top with the highest IFS spreads in 2009. Moreover, the region has 12 countries in the top 30 with the highest NIM but this time Brazil does not rank at the top but it is replaced by Ecuador being ranked 3<sup>rd</sup> among 121 countries. In terms of I&R factors LAC has 11 countries in the top 30 with the highest spreads with Ecuador ranked 3<sup>rd</sup> , Jamaica 4<sup>th</sup> and Brazil ranked 17<sup>th</sup> among 121 countries in 2009. On the other hand, in terms of macro-factors LAC has 6 countries in the top 30 with the highest spreads with Costa Rica ranking4<sup>th</sup> , Paraguay7<sup>th</sup> , while Brazil is not ranked in the top 30 countries in 2009. It appears that the region and Brazil in particular, are doing well in terms of macro-factors but poorly in terms of I&R.

# **_5.3 Brazil and International Trends_**

Our findings suggest that I&R factors are the main drivers of NIM spreads across the world. We observe a high positive correlation between NIM and I&R factors (Figure 7a) in 2008 as well as in 2009. Brazil follows this global trend of where I&R are highly correlated with NIM, where the profitability of the banks is mainly determined by I&R factors (Figure 3b). In many countries around the world, banks seem to place more significance on I&R factors when determining their lending and borrowing spreads. However, the opposite should occur. Banks should have a tendency towards basing their spreads partly according to macro-factors because they lend to a broad spectrum of firms and individuals whose ability to repay is largely based on the health of the macro-economy and the markets they operate. Brazil’s banks place greater significance on I&R factors accounting for 79 percent of the NIM in 2009.

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