Does monetary policy affect the net interest margin of credit institutions? Evidence from Colombia

Autor o Editor
Pirateque-Niño, Javier Eliecer
Rodríguez-Novoa, Daniela
Piñeros-Gordo, José Hernán

The series Borradores de Economía (Working Papers on Economics) contributes to the dissemination and promotion of the work by researchers from the institution. On multiple occasions, these works have been the result of collaborative work with individuals from other national or international institutions. This series is indexed at Research Papers in Economics (RePEc). The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

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This paper analyzes empirically the relationship between monetary policy interventions and the net interest margin of Colombian credit institutions for the 2003 - 2019 period. Considering the endogeneity problem that arises when analysing this relationship, we calculate a series of monetary policy shocks as the residuals of regressing the monetary policy rate on a set of quantifiable variables that the Central Bank of Colombia's Board of Directors had at each of its monetary policy meetings. Thereafter, we conduct a panel regression analysis in which we relate these shocks, and a set of macroeconomic and bank-specific variables to the net interest margin. Through a non-linear approach, we find a significant quadratic relationship, which reflects that once the endogeneity problem is overcome, the net interest margin increases to policy shocks. The net interest margin increases to
positive policy shocks due to the different dynamics of deposits and loans, and increases to negative policy shocks given the higher sensitivity of banks' funding costs compared to the one of interest income.