The Effect of Credit Rationing, Creditworthiness, and Commitments on Commercial Loan Pricing: Theory and Empirical Evidence

69 Pages Posted: 20 May 2020

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Irvin Morgan

affiliation not provided to SSRN

Norris Larrymore

affiliation not provided to SSRN

Date Written: April 23, 2020

Abstract

This paper examines whether U.S. commercial lenders are appropriately compensated on commitment loans under a constant spread, variable rate formula, during recessions. Using the Loan Pricing Corporation (LPC) DealScan database, for periods preceding, during, and following the 1990/91 and 2001 recessions, we test whether lenders employing constant spreads on loan commitments cover their credit risk. During recessions, we find that constant loan spreads do not adequately compensate lenders for exposure to weak creditworthy borrowers and that to maintain their risk-reward objectives, lenders rein in risk by raising rates on new borrowers and by reconstituting loan portfolios.

Keywords: commercial loan pricing, recessions

Suggested Citation

Daniels, Kenneth N. and Morgan, Irvin and Larrymore, Norris, The Effect of Credit Rationing, Creditworthiness, and Commitments on Commercial Loan Pricing: Theory and Empirical Evidence (April 23, 2020). Available at SSRN: https://ssrn.com/abstract=3583337 or http://dx.doi.org/10.2139/ssrn.3583337

Kenneth N. Daniels (Contact Author)

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Irvin Morgan

affiliation not provided to SSRN

Norris Larrymore

affiliation not provided to SSRN

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