Title: Credit and liquidity risk in the determination of spread over business cycles

Authors: Eduardo Medeiros Rubik; Vinicius Amorim Sobreiro; Herbert Kimura

Addresses: Department of Management, University of Brasília, Campus Darcy Ribeiro, Brasília, Federal District, 70910-900, Brazil ' Department of Management, University of Brasília, Campus Darcy Ribeiro, Brasília, Federal District, 70910-900, Brazil ' Department of Management, University of Brasília, Campus Darcy Ribeiro, Brasília, Federal District, 70910-900, Brazil

Abstract: The difference between the amount paid to depositors and the amount charged from borrowers, defined as bank spread, is determined by several factors. Two of them, according to theoretical models, are credit risk and liquidity risk. In this context, we aim to analyse whether these factors change their influence on spread over different periods of business cycles. Brazilian banks were used to evaluate the behaviour of spread at various periods during business cycles by applying the modelling suggested by Aydemir and Guloglu (2017). However, the results show that the influence of credit risk and liquidity risk on the average conditional spread does not change at different periods over business cycles. Furthermore, credit risk and liquidity risk adversely affect spread, contradicting studies on the Brazilian economy, such as Almeida and Divino (2015). Finally, we conclude that spread is procyclical and has a high speed of adjustment.

Keywords: credit risk; liquidity risk; bank spread; business cycle.

DOI: 10.1504/IJFIB.2021.114933

International Journal of Financial Innovation in Banking, 2021 Vol.3 No.1, pp.26 - 48

Received: 31 Oct 2019
Accepted: 06 Apr 2020
Published online: 12 May 2021 *

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