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A large body of literature exists on the potential impact that capital account liberalization has had on uncovered interest rate parity. However, it can also have important effects on domestic bank spreads by providing economies of scale and scope and increasing competitive pressures. This article provides an investigation of how capital account liberalization has affected the interest rate margins of the domestic banking markets in 112 countries. The study finds that contrary to a priori reasoning, opening a country's capital account has little or no impact on interest rate spreads obtained by the banking industries in the study. These results are robust to various changes in model specification and estimation approach.
