Risk aversion and bank loan pricing

Gonzalo Camba-Mendez and Francesco Mongelli

No 2514, Working Paper Series from European Central Bank

Abstract: How much of the heterogeneity in bank loan pricing is explained by disparities in banks’ attitude towards risk? The answer to this question is not simple because there are only very weak proxies for gauging the degree of a bank’s risk aversion. We handle this constraint by means of a novel econometric approach that allows us to disentangle the amount of risk faced by banks and the price they charge for holding that risk. Some of our results are aligned with previous studies and confirm that disparities in market power, banks’ funding costs, and banks’ funding risks are reflected in bank lending rates. However, our new modelling framework reveals that the heterogeneity in bank lending rates is also a reflection of the non-negligible disparities in banks’ risk aversion. JEL Classification: C23, E58, G21

Keywords: bank loan pricing; risk aversion (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ban and nep-cwa
Note: 1423663
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Citations: View citations in EconPapers (1)

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Journal Article: Risk aversion and bank loan pricing (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212514

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