Risk-based pricing in competitive lending markets

Henrik Andersen, Ragnar E Juelsrud and Carola Müller

No 1169, BIS Working Papers from Bank for International Settlements

Abstract: We use unique relationship-level data which includes banks' private risk assessments of corporate borrowers to quantify how competition among banks affects the risk sensitivity of interest rates in the corporate credit market. We show that an increase in competition makes corporate lending rates less sensitive to banks' own assessment of borrower probability of default and this is more pronounced in market segments with higher degree of asymmetric information. Our results are driven by banks with low franchise values, outlining a novel channel of how the competition-fragility nexus can operate.

Keywords: banking competition; relationship lending; credit markets; risk-based pricing; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-ban, nep-com, nep-fdg, nep-ifn and nep-rmg
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