Loan Pricing by Euro Area Risk Averse Banks in an Environment of Extended Central Bank Liquidity Provision

29 Pages Posted: 28 Oct 2019

See all articles by Gonzalo Camba-Mendez

Gonzalo Camba-Mendez

European Central Bank (ECB)

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Date Written: May 14, 2019

Abstract

This paper studies bank loan pricing in the euro area over the period October 2008 to October 2014. This period was characterised by market fragmentation and extended liquidity provision by the ECB. For our analysis we develop a theoretical framework which accounts for the main financing risks faced by euro area banks during this challenging period. In our modelling framework risk aversion plays a critical role, and this is challenging for our empirical analysis. We handle this issue by means of a novel econometric approach whereby bank risk aversion is treated as an unobservable random effect. We find that banks that have access to money markets, and are less reliant on ECB financing, can finance at a lower cost, and can thus offer lower bank lending rates. We also find that banks with a lower cost of debt financing offer lower lending rates. Our results also show that after accounting for financing risks, credit risks, market power and bank business model, our empirical estimates of banks' risk aversion are still positively and significantly correlated with country specific effects, thus highlighting the fragmentation of retail banking along national lines within the euro area.

Keywords: bank loan pricing, bank financing, market fragmentation

JEL Classification: C23, E58, G01, G21

Suggested Citation

Camba-Mendez, Gonzalo and Mongelli, Francesco Paolo, Loan Pricing by Euro Area Risk Averse Banks in an Environment of Extended Central Bank Liquidity Provision (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3471797 or http://dx.doi.org/10.2139/ssrn.3471797

Gonzalo Camba-Mendez (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Francesco Paolo Mongelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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