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

55 Pages Posted: 16 May 2019 Last revised: 20 Apr 2020

See all articles by Cem Demiroglu

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Guner Velioglu

Loyola University Chicago - Department of Finance

Date Written: April 11, 2020

Abstract

Past studies find that commercial loan spreads are “sticky,” in the sense that they do not fully respond to changes in 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 credit market conditions and observable firm credit risk characteristics. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing.

Keywords: Bank lending, loan pricing, private information

JEL Classification: G21, G32

Suggested Citation

Demiroglu, Cem and James, Christopher M. and Velioglu, Guner, Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads (April 11, 2020). Available at SSRN: https://ssrn.com/abstract=3384414 or http://dx.doi.org/10.2139/ssrn.3384414

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

Guner Velioglu (Contact Author)

Loyola University Chicago - Department of Finance ( email )

820 North Michigan Avenue
Chicago, IL 60611
United States

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