The impact of regulatory measures on commercial bank interest rates: A microanalysis of the Barbados case

Since the establishment of the Central Bank of Barbados in 1972, commercial banks have been subjected to a wide variety of regulatory controls. This study estimates the impact, on commercial banks' interest-rate behaviour, of the more pervasive regulatory measures adopted by the Central Bank. It presents a model of commercial banking interest rate behaviour and estimates the system of the reduced form equations derived there from. The policy variables included in the system are: the bank rate, the average lending rate ceiling, the cash reserve ratio, the stipulated government securities ratio, and the savings deposits rate floor. The results indicate that the cash ratio, the stipulated government securities ratio and the savings deposits rate floor impacted significantly on the loan rate for every bank. However, these three measures had a less pervasive influence on the deposit rate. In general, the deposit rate for any given bank has been responsive to fewer policy variables than the loan rate. The loan rates, though generally responsive to all policy variables other than the bank rate, have exhibited very low elasticities. The loan and deposits rates have been most responsive to changes in the stipulated government securities ratio. The cash reserve ratio has had the second strongest effect. The results indicated that the ceiling on the average lending rate, when it existed, depressed loan rate by less than one per cent, on average. This is largely attributable to the Central Bank's policy of adjusting the ceiling in line with market trends.