Highlighting the difficulty in finding the most appropriate measure of banking spreads, Brock and Rojas Suarez (2000) present six alternative proxies for bank spreads, ranging from a narrow concept— one that includes loans on the asset side and deposits on the liability side—to a broad concept where all interest earning assets and liabilities plus associates fees and commissions are included. Their calculations are based on data from the Bank Superintendents of the countries in the sample.

A single country study by Afanasieff, Lhacer, and Nakane (2002) aims to uncover the main determinants of the bank interest spreads in Brazil. The main question the paper addresses is whether macro or microeconomic factors are the most relevant in affecting the behavior of such rates. The twostep approach of Ho and Saunders (1981) is employed to measure the relative relevance of the micro and the macro elements. The first step involves estimating the pure spread along the lines of Saunders and Schumacher (2000). The role played by the inflation rate, risk premium, economic activity, required reserves (all macroeconomic factors) and CAMEL-type indicators (microeconomic factors) are highlighted. Their results suggest that macroeconomic variables are the most relevant factors to explain the behavior of bank interest spread in Brazil.<sup>6</sup> In a paper related to that of Afanasieff, Lhacer, and Nakane (2002), da Silva, Oreiro, and de Paula (2006) analyze the determinants of bank spreads in Brazil, especially the macroeconomic determinants of spreads. A VAR model is used to identify the macroeconomic variables that may directly or indirectly have been influencing spreads in Brazil over the period 1994-2005. They present evidence that interest rate levels and, to a lesser degree, the inflation rate are the main macroeconomic determinants of high bank spreads in Brazil, and note that the actual net interest margin comprises two elements: the “pure” bank spread and the “impure” net interest margin explained by institutional and regulatory factors.<sup>7</sup> Another relevant study of the determinants of bank spreads in Brazil was conducted by the Banco Central do Brasil (BCB) in connection with the project “ _Juros e spread bancário_ ” (“Interest rates and bank spread”). This study offers an accounting breakdown of spreads. The spreads in Brazil are broken down on the basis of the margins charged by a sample of banks that from 2004 onwards, encompasses all banks operating in Brazil for which information (on their fixed-rate, freely-allocated credit operations only) is available at each base date. The following components are considered: (a) a residual corresponding, by and large, to bank net margin; (b) tax wedge, including direct and indirect taxes; (c) _Fundo Garantidor de Crédito_ (FGC, credit guarantee fund); (d) overhead; and (e) default (provision expenses for non-performing loans). The authors show how each of these components affects bank spreads in Brazil, using a methodology revised in 2004.

The study by the BCB finds that the most important constituent factors of spreads are respectively, net interest margin (a 2000-2003 average of 26.9 percent) and overhead (26.0 percent), followed by tax wedge (21.6 percent) and provision expenses (19.9 percent). Their estimations conclude that the average spreads among Brazilian banks depend on the basic interest rate, bank overhead, risk and taxes. As the variables were expressed as natural logarithms, it follows that the coefficients of the equation

> 6 The pure rate has also been derived in single-country studies by Ho and Saunders (1981) and Angbazo (1997) for US banks, by McShane and Sharpe (1985) for Australian banks, and by Afanasieff, Lhacer, and Nakane (2002) for Brazilian banks.

> 7 The methodology assumes actual spreads comprise of “pure” spreads adjusted upwards or downwards by implicit interest expense (bank charges for certain classes of customer exempt), by the opportunity cost of holding reserves and by capital requirements resulting from regulatory standards and bank supervision rules.

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