Controlled spread

Wellton Maximo
Reporter from Agência Brasil

Brasilia – The monetary tightening promoted by the Central Bank (BC) has resulted in higher interest rates for borrowers. However, banks have so far not taken advantage of the higher rates to increase profits. According to the most recent data released by the BC, the bank spread (the difference between the rates that financial institutions pay to raise funds and the interest charged to the end customer) has fallen in recent months, despite the Selic rate (the basic interest rate of the economy) having been adjusted three times in a row.

In June, according to the monetary authority, the spread reached 10,9% per year, accumulating a decrease of 0,6 percentage points in the first half of the year and 1,9 percentage points in the last 12 months. In the last 18 months, the indicator registered an increase in only two months: in July of last year and in January of this year.

If only credit to individuals is considered, the difference between borrowing and lending interest rates was 16,3% per year, also showing a decrease of 1,4 percentage points in 2013. Regarding loans to companies, the spread fell to 6,7% per year, with a cumulative reduction of 0,3 percentage points during the year.

The drop in the spread occurs because banks have not yet fully passed on to customers the increase in rates used for funding, when financial institutions borrow money from account holders and offer interest on investments such as savings accounts and Certificates of Deposit (CDBs), and in the interest charged on granting credit. Directly influenced by the Selic rate, the average funding rate rose from 6,8% per year in May to 7,6% in June, an increase of 0,8 percentage points from one month to the next.

The average interest rates paid by borrowers also rose, but at a slower pace. The average lending rate, as the Central Bank calls the interest rates for end customers, increased from 18,1% per year in May to 18,5% in June, a growth of 0,4 percentage points. The combination of these two factors resulted in a decrease in the bank spread during the peak of the Selic rate cycle.

According to Maryse Farhi, a professor at the Institute of Economics at the University of Campinas (Unicamp), the decrease in the spread can be explained by the excess liquidity – money in circulation – in the financial sector and the prospect that default rates will remain under control in the coming months. "Banks, in general, tend to increase the spread when they fear instability. This is not the current situation," she explains.

Maryse, a financial markets expert, says that low unemployment prevents banks from increasing the spread because it reduces the risk of default by borrowers. "There would be a big problem for banks if unemployment were rising, but that's not happening. Those who borrow money, in most cases, are able to repay it without putting pressure on default rates," she comments.