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Bank Loan Pricing in an Imperfectly Competitive Bank Market

22 Pages Posted: 16 May 2014  

Vlasis Gitzos

Athens University of Economics and Business AUEB

Kostas Vladimirou Kalevras

Athens University of Economics and Business, Department of Economics, Students

Date Written: April 1, 2014

Abstract

This paper presents a theoretical model of bank loan pricing in an imperfectly competitive interbank market under Basel capital requirements. It is based on the relevant work by Ruthenberg and Landskroner (2008) who develop a model along the same lines, although our model incorporates more realistic assumptions such as a non-zero Recovery Rate on loans and a securities portfolio to match capital and reserves. Under the loan-pricing equation suggested, quoted loan rates depend on monopoly power, elasticity of demand for loans, risk premiums (in the interbank market and for individual borrowers) and the market required Return-On-Equity weighted by Basel risk-weighted capital ratios. The borrower’s Probability of Survival enters as a compounding factor for the whole loan rate.

Keywords: bank loans, imperfect competition, interbank rate, risk premium, bank loan rate

Suggested Citation

Gitzos, Vlasis and Kalevras, Kostas Vladimirou, Bank Loan Pricing in an Imperfectly Competitive Bank Market (April 1, 2014). Available at SSRN: https://ssrn.com/abstract=2432218 or http://dx.doi.org/10.2139/ssrn.2432218

Vlasis Gitzos

Athens University of Economics and Business AUEB ( email )

76 Patission Street
GR-10434 Athens
Greece
2108203911 (Phone)

HOME PAGE: http://www.aueb.gr

Kostas Vladimirou Kalevras (Contact Author)

Athens University of Economics and Business, Department of Economics, Students ( email )

Athens
Greece

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