Risk Aversion and Bank Loan Pricing

20 Pages Posted: 5 Mar 2021

See all articles by Gonzalo Camba-Méndez

Gonzalo Camba-Méndez

European Central Bank (ECB)

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Date Written: January, 2021

Abstract

How much of the heterogeneity in bank loan pricing is explained by disparities in banks’ attitude towards risk? The answer to this question is not simple because there are only very weak proxies for gauging the degree of a bank’s risk aversion. We handle this constraint by means of a novel econometric approach that allows us to disentangle the amount of risk faced by banks and the price they charge for holding that risk. Some of our results are aligned with previous studies and confirm that disparities in market power, banks’ funding costs, and banks’ funding risks are reflected in bank lending rates. However, our new modelling framework reveals that the heterogeneity in bank lending rates is also a reflection of the non-negligible disparities in banks’ risk aversion.

JEL Classification: C23, E58, G21

Suggested Citation

Camba-Méndez, Gonzalo and Mongelli, Francesco Paolo, Risk Aversion and Bank Loan Pricing (January, 2021). ECB Working Paper No. 2021/2514, Available at SSRN: https://ssrn.com/abstract=3797134 or http://dx.doi.org/10.2139/ssrn.3797134

Gonzalo Camba-Méndez (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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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