Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads

Abstract

Past studies find that commercial loan spreads are "sticky" in the sense that they do not fully respond to changes in open market rates or observable firm credit risk characteristics. In this paper, we provide evidence that the appearance of stickiness arises, in part, because the intensity of bank screening varies inversely with changes in both observable firm credit risk characteristics and credit market conditions. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing or misallocation of credit.

Keywords: Loan Spreads, Relationship Lending, Private Information, Anchoring

JEL Classification: G21, G30, G32