Observables and residuals: exploring cross-border differences in Small and Medium Enterprise borrowing costs

James Carroll and Fergal McCann ()
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James Carroll: Trinity College Dublin

No 02/RT/17, Research Technical Papers from Central Bank of Ireland

Abstract: Cross-country comparisons of average loan interest rates, often carried out using statistics provided by national and international authorities, should be accompanied by strong caveats. If underlying compositional differences in loans, borrowers or lenders are unaccounted for, claims of over/under-pricing may be unfounded. In this paper, we propose a simple methodology that compares interest rates between countries after controlling for such differences. We apply our method to loan-level data from three Irish banks operating in both Ireland and the UK. We find that controlling for such factors reduces the the cross-country interest rate premium significantly. We attribute any remaining interest rate “gap” to overall lending market conditions – for example, to differences in the recoverability of collateral, the level of competition among banks, the aggregate perception of risk, or banks’ expectations on the relative movements in policy rates and exchange rates between the UK and the euro area.

Keywords: SME; loan-level data; interest rate differentials (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-ban, nep-ent and nep-ifn
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