estimated are simply the elasticity of spreads to each of these variables. The most striking about the Central Bank study is the high sensitivity of bank spreads to variations in bank overheads: from the equation estimated by the Central Bank, a 1.0 percent reduction in bank overheads would yield a 1.55 percent reduction in spreads charged by banks. Also, banks’ net interest margins contribute substantially to spread composition. The analysis by BCB (2007) complements our analysis, and comes to similar conclusions on the determinants of the spreads.

Furthermore, Demirguc-Kunt, Laeven and Levine (2003) examines the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data on over 1,400 banks across 72 countries ranging from 1995-1999 while controlling for bank-specific characteristics. Two dependent variables are examined in order to gauge the cost of financial intermediation: the NIM and overhead expenditures. Peria and Mody (2003) investigate the impact of foreign bank participation and concentration on bank spreads in a sample of developing Latin American countries during the late 1990s.<sup>8</sup> Maudos and de Guevara (2004) perform an analysis that extends the data coverage from Saunders and Schumacher (2000). Maudos and de Guevara still use the NIM as the dependent variable in their estimations of the determinants of spreads, but also derive the pure margin along the lines of Saunders and Schumacher (2000). Their model shows that the “pure” interest margin depends on the competitive conditions of the market, the interest rate risk, the credit risk, the average operating expenses and the risk aversion of banking firms, as well as on other variables not explicitly introduced into the model (opportunity cost of reserves, payment of implicit interest and quality of management).<sup>9</sup> Their starting point is the methodology developed in the original study by Ho and Saunders (1981) and Saunders and Schumacher (2000) but it is expanded to explicitly account for banks operating costs.

The Maudos and de Guevara (2004) study differs from Saunders and Schumacher (2000) in several aspects: (a) they introduce the influence of operating costs into the modeling of the interest margin; (b) use direct measurements of market power; (c) the determinants of the interest margin are analyzed in a single stage; (d) it extends the period of study until the year 2000, though it is centered on the principal European countries (Germany, France, United Kingdom, Italy and Spain); and (e) the sample consists of a panel data of 1,826 banks (in 2000), as opposed to the 614 of Saunders and Schumacher’s study. However, the study by Maudos and de Guevara (2004) does not perform the analyses on the pure spread but rather on the NIMs as Saunders and Schumacher (2000) do.

Moreover, Gelos (2006, 2009) finds that intermediation spreads in Latin America are high by international standards. The paper examines the determinants of bank interest margins in the region using bank and country-level data from 85 countries, including 14 Latin American economies, for the period 1999–2002. The focus is on ex-post net interest margins, as opposed to ex-ante spreads between deposit and loan rates, which allows for a broader examination of the costs of financial intermediation.

> 8 Using bank-level data for Argentina, Chile, Colombia, Mexico, and Peru, they examine a number of hypotheses. Their econometric analysis is on the impact of concentration and foreign bank presence on bank spreads; they particularly study the effect of market structure changes on bank spreads, while controlling for a host of bank characteristics and macroeconomic variables.

> 9 They study the NIM in the main European banking systems (Germany, France, the United Kingdom, Italy and Spain) during the period 1993-2000 using a panel of 15,888 observations and identify the fundamental elements affecting this margin.

8