Rules versus discretion in loan rate setting

Geraldo Cerqueiro, Hans Degryse and Steven Ongena

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: We propose a heteroscedastic regression model to identify the determinants of the dispersion in interest rates on loans granted to small and medium sized enterprises. We interpret unexplained deviations as evidence of the banks’ discretionary use of market power in the loan rate setting process. “Discretion” in the loan-pricing process is most important, we find, if: (i) loans are small and uncollateralized; (ii) firms are small, risky and difficult to monitor; (iii) firms’ owners are older, and, (iv) the banking market where the firm operates is large and highly concentrated. We also find that the weight of “discretion” in loan rates of small credits to opaque firms has decreased somewhat over the last fifteen years, consistent with the proliferation of information-technologies in the banking industry. Overall, our results reflect the relevance in the credit market of the costs firms face in searching information and switching lenders.

Keywords: financial intermediation; loan rates; price discrimination; variance analysis. (search for similar items in EconPapers)
JEL-codes: G21 L11 (search for similar items in EconPapers)
Date: 2007-08
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Rules versus discretion in loan rate setting (2011)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
Working Paper: Rules versus Discretion in Loan Rate Setting (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:ces0723

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