Cross-subsidization of Bad Credit in a Lending Crisis

Nikolaos Artavanis, Brian Jonghwan Lee, Stavros Panageas and Margarita Tsoutsoura

No 29850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the corporate-loan pricing decisions of a major Greek bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the “breakeven rate” of each loan, as computed by the bank’s own loan-pricing department (in effect, the loan’s marginal cost). We document that low-breakeven-rate (safer) borrowers are charged significant markups, whereas high-breakeven-rate (riskier) borrowers are charged small and sometimes even negative markups. We rationalize this de-facto cross-subsidization of riskier borrowers by safer borrowers through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.

JEL-codes: E43 E44 G01 G21 G3 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-mac
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