Abstract
The article reviews the scientific literature about the determinants of credit spreads in Brazil. Econometric evidence shows that market concentration, a proxy for (un)competitive behavior, is statistically significant for all studies surveyed. We posit that that higher concentration is part of a well-defined strategy by the Brazilian Central Bank that favors prudence over efficiency. Other variables that help explain why spread in Brazil is among the highest in the world include market microstructure, operating costs, credit risk, opportunity costs, managerial quality, nominal interest rates (SELIC), market concentration, interest rate volatility, earmarked credit, and GDP.
Highlights
Lending rates for consumers and businesses in Brazil have been the highest in the world for the last 25 years
We describe how the Brazilian financial crisis of the mid-1990s has tightened financial regulation in Brazil and how the Central Bank has overseen a consolidation process in the credit market – the share of the five largest lenders, as measured by the total assets held by these institutions over the total assets of the industry, has climbed from 50% in 2000 to more than 80% in 2019
That we have presented the context of Brazilian credit markets and preliminary evidence on the determinants of lending rates in the country, we move to answer the question: why are spreads so high in Brazil?
Summary
Lending rates for consumers and businesses in Brazil have been the highest in the world for the last 25 years. In 2013, as a result of a credit boom fueled mostly by public banks’ lending, did borrowing rates for small and medium-sized enterprises descend from 30% per year, in nominal terms (inflation has rarely topped double digits during this period). We describe how the Brazilian financial crisis of the mid-1990s has tightened financial regulation in Brazil and how the Central Bank has overseen a consolidation process in the credit market – the share of the five largest lenders, as measured by the total assets held by these institutions over the total assets of the industry, has climbed from 50% in 2000 to more than 80% in 2019. The rest of the article is divided as follows: the section traces the evolution of Brazilian credit markets since the end of the hyperinflation era in the mid-1990s; the third section describes which variables could drive credit spreads; and the last section summarizes the econometric results found in the scientific literature
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