Bank spreads resist falling, despite falling interest rates.

The drop in the economy's basic interest rates is taking longer to reach final borrowers and those seeking financing. Although the Central Bank (BC) has reduced the Selic rate twice since October, the interest rates charged by banks are not falling at the same rate. The explanation lies in the bank spread, which accumulated increases in October and November, even with the Selic rate falling.

The bank spread is the difference between the rates that financial institutions pay to raise funds and the rates they charge the end customer. This indicator, published monthly by the Central Bank, fell 0,4 percentage points in November. However, with the 1 percentage point increase recorded in October, the spread has accumulated a 0,6 percentage point increase in the last quarter of 2016. The calculation only covers free credit operations, made with the banks' own resources, excluding directed credit, granted with government subsidies.

The difference can be observed when comparing the evolution of the rates used for raising funds and the interest rates charged for granting credit. The average rate for raising funds was 12,1% per year in November, according to the most recent data from the Central Bank. This is the rate that banks pay to borrow money from account holders through investments such as savings accounts, Certificates of Deposit (CDBs), and investment funds.

Even with the Selic rate being reduced by 0,5 percentage points – from 14,25% to 13,75% per year – since October, the average borrowing rate has accumulated a drop of only 0,1 percentage points in October and November, from 12,2% to 12,1% per year.

The average interest rates paid by borrowers and those taking out loans, however, did not follow the same trajectory and increased, even with the Selic rate falling. The average lending rate, as the Central Bank calls the interest rates for end customers, accumulated an increase of 0,5 percentage points in October and November, rising from 53,4% ​​to 53,9% per year during the period. The spread – the difference between the two rates – rose from 41,2% to 41,8% per year (0,6 percentage points) in the same comparison.

Public Accounts

Carlos Eduardo de Freitas, director of the Central Bank in the 80s and early 2000s, says he is not surprised by the resistance to a decrease in the bank spread. According to him, the decline in this indicator fundamentally depends on the economy's ability to recover and the reduction of imbalances in public accounts.

“The bank spread is much more related to economic conditions than to movements in the Selic rate. As long as public accounts are unbalanced, the spread will not fall. Throughout my career, I only saw the bank spread fall in the 2000s, precisely when the country was making high primary surpluses [savings to pay interest on public debt],” he says.

Abuse

Professor of Finance Fabio Gallo, from the Getulio Vargas Foundation (FGV) in São Paulo, considers it a historical pattern in the financial sector to maintain high bank spreads and profit during times of crisis. According to him, this behavior occurs worldwide, but is aggravated by the concentration in the Brazilian financial sector, with few banks competing with each other.

“Banks claim that default rates, taxation, and reserve requirements [the portion they are required to keep deposited with the Central Bank] are high in Brazil. This is true, but it doesn't fully explain the bank spread. Default rates are starting to fall. The fact is that banks have never been able to fully justify such high spreads in Brazil. Worldwide, banks profit during times of crisis. In Brazil, too,” he states.