By 
Banks generate profits through something called banking spread, a concept that answers the question of how banks make money.
Understanding the banking spread may seem complex, but it actually simplifies the operational logic of traditional banking institutions and their related investments in the financial market.
Understanding banking spread is crucial for individuals looking to engage in the market, as it pertains to the interest paid on loans and the earnings from investments.
What does banking spread refer to?
The banking spread refers to the disparity between the amount a bank pays to acquire funds from a saver or investor and the interest it charges borrowers when lending out the same funds.
Owning a clothing store requires selling goods at prices higher than the purchase cost to ensure profitability and sustainability. Without a profit, keeping the store open would not be worthwhile.
If items are bought for a certain cost, they must be resold at a different price. This principle is similar to the dynamic between a bank, its investors, and borrowers who utilize its loan services, known as the bank spread.
How is the calculation of banking spread done?
The financial market spread is determined through a basic formula, which involves comparing the average interest rate for loans to the average interest rate for deposits in a given year.
Bank spread is calculated by subtracting the catch rate from the burst rate.
We will now provide a practical example to further clarify the banking spread formula.
Calculating bank spread methods
As an investor, if you keep your money in a savings account earning 6% annually, the bank will lend your money to a businessman at a 20% interest rate per year, resulting in a bank spread.
The bank spread is calculated by subtracting the catch rate from the burst rate.
14%
The text was synchronized and revised by an elderman.
In this arrangement involving you as the investor, the bank, and the entrepreneur, the bank stands to earn a significant annual profit of 14%.
The interest rate is typically high because banks need to cover the credit risk associated with issuing loans, which includes factors like default rates and administrative expenses.
Banks must also generate a profit from transactions, similar to the store example, in order to justify offering loans.
What makes up the banking spread?
The banking spread consists of various concepts and fees, which determine the profit rate earned by the bank through its investment and loan relationships. These rates are interrelated and contribute to the spread calculation.
The bank still needs to maintain a profit margin even after covering all these expenses when we consider the store example.
Administrative expenses
The spread is designed to increase a bank’s expenses as it is a key source of revenue, raising costs such as employee wages and other expenses.
Compulsory fees, FGC, and taxation fees
The Central Bank holds a portion of the deposits collected by other banks to regulate the money supply in the economy. A significant amount of these funds retained by the Central Bank is allocated to the Credit Guarantee Fund (FGC).
Direct taxes refer to taxes that are imposed directly on individuals or entities, such as income tax or property tax.
Income Tax (IR), Financial Operation Tax (IOF), Social Integration Program (PIS), Social Security Financing (COFINS), and Liquid Profit Social Contribution (CSLL) influence the formation of bank spreads due to their significance, affecting their overall value.
Failure to pay.
People or entities that do not repay loans to the bank are considered to be defaulting on the money they borrowed, which significantly influences the bank’s spread calculation due to the risk of non-repayment.
Earnings
This variable signifies the segment of the bank’s spread that generates profits for its shareholders.
Each of the values mentioned above carries varying importance in the spread composition. For instance, the administrative cost has a significantly lesser influence compared to the default spread value.
We will now explore why the Brazilian banking spread is significant and how it can be reduced.
Why is the interest rate on loans so elevated in Brazil?
The banking margin in Brazil has historically been elevated, shaped by a mix of intricate elements.
Country’s history
The nation is dealing with long-standing economic issues like economic uncertainty and rising prices, leading to higher financial risks for institutions that are then passed on to customers in the form of increased spreads.
Regulations and rules governing a certain area
The regulatory landscape in Brazil is recognized for its intricacy and significant operational expenses for financial institutions, stemming from capital mandates, stringent rules, and compliance costs.
Default is an important factor that impacts spreads due to the expenses related to credit recovery and risk management.
Bank concentration – Concentration of banks
Banking concentration in Brazil, where a small number of major banks control the market, hampers competition and enables banks to maintain higher spreads. Furthermore, the significant tax burden in the country directly affects the operational expenses of financial institutions.
Cost of credit
The credit expense, influenced by Central Bank interest rates, directly affects banking spreads. High borrowing costs for banks are reflected in these spreads, as well as the impact of fundraising costs on bank rates.
Competition and the interaction of prices
In Brazil, high banking spreads are attributed to the absence of strong competition and pricing practices that generate greater profit margins.
Changes in these patterns may happen due to economic, regulatory, and structural shifts, such as government efforts to enhance competition in the financial industry, leading to notable effects on banking margins in the long run.
How can the banking spread in Brazil be decreased?
In Brazil, various actions and ideas have been examined and put into practice to decrease the substantial difference in banking rates. This focus shows a desire for improved effectiveness, openness, and rivalry in the financial industry, with the goal of aiding consumers and the economy overall.
Government programs
Efforts to encourage competition and urge banks to provide more competitive rates include simplifying regulations and making it easier for new players to enter the market.
2. Technological advancements and creativity
The growth of financial technology companies has led to greater competitiveness in the financial industry. Authorities have backed projects promoting tech innovation to cultivate a setting favorable for the development of better and more cost-effective financial services.
Financial aid
Campaigns and programs can be established to increase awareness of banking practices, such as spread calculation, in order to empower consumers and advocate for fairer financial services.
4. Clarity
Proposals to regulate the transparent and cost-effective disclosure of banking spread rates and components seek to empower customers, enabling them to make better-informed decisions and promote increased competition.
Five. Access to credit
Efforts to make it easier to get loans, particularly for small businesses and individuals with low incomes, are being considered. Increasing access may weaken banks’ negotiating leverage, leading to lower interest rate differences.
6. Policies related to money supply
Adjustments to the basic interest rate in monetary policies are seen as a method to impact the cost of borrowing from banks.
A decrease in the base interest rate could have a positive effect on lowering the banking spread.
International collaboration
Brazil has aimed to draw lessons from global experiences and collaborations with international financial institutions to discover effective approaches that can be implemented domestically. This involves studying regulatory frameworks and methods used in other nations with reduced spreads.
These measures and proposals show a collaborative attempt to tackle the issues causing high banking spreads in Brazil.
In conclusion
The problem of banking spread in Brazil is complex, involving various economic, regulatory, and structural factors.
The measures and proposals discussed indicate an ongoing effort to enhance efficiency, transparency, and competition in the financial industry.
Technology’s vital role, the significance of financial literacy, and the necessity of government regulations promoting competition are key elements in creating a fairer and more consumer-centric financial landscape.
Achieving a positive evolution in the scenario of banking spread in Brazil is a crucial challenge as the country advances, striking a balance between bank interests and consumer protection.
Comments