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http://ssrn.com/abstract=965447
 
 

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Rules versus Discretion in Loan Rate Setting


Hans Degryse


KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Geraldo Cerqueiro


Catolica Lisbon School of Business and Economics

Steven Ongena


University of Zurich and SFI

September 2007

TILEC Discussion Paper No. 2007-026
CentER Discussion Paper No. 2007-59
CESifo Working Paper Series No. 2091

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.

Number of Pages in PDF File: 47

Keywords: financial intermediation. loan rates, price discrimination, variance analysis

JEL Classification: G21, L11

working papers series


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Date posted: March 2, 2007 ; Last revised: February 20, 2014

Suggested Citation

Degryse, Hans and Cerqueiro, Geraldo and Ongena, Steven, Rules versus Discretion in Loan Rate Setting (September 2007). ; CentER Discussion Paper No. 2007-59; CESifo Working Paper Series No. 2091. Available at SSRN: http://ssrn.com/abstract=965447 or http://dx.doi.org/10.2139/ssrn.965447

Contact Information

Hans Degryse
KU Leuven, Department Accounting, Finance and Insurance ( email )
Naamsestraat 69
Leuven, B-3000
Belgium
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Geraldo Cerqueiro (Contact Author)
Catolica Lisbon School of Business and Economics ( email )
palma de Cima
Lisbon, 1649-023
Portugal
Steven R. G. Ongena
University of Zurich and SFI ( email )
Plattenstrasse 14
Zürich, 8032
Switzerland
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