Cross-subsidization of Bad Credit in a Lending Crisis
62 Pages Posted: 4 Apr 2022 Last revised: 23 Jan 2023
Date Written: March 10, 2022
We study the corporate-loan pricing decisions of a major, systemic bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the “breakeven rate” (BE rate) of each loan, as computed by the bank’s own loan-pricing department (in effect, the loan’s marginal cost). We document that low-BE rate (safer) borrowers are charged significant markups, whereas high-BE rate (riskier) borrowers are charged smaller and even negative markups. We rationalize this de facto cross-subsidization through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.
Keywords: Interest pass-through, cross-subsidization, financial crisis, zombie lending
JEL Classification: E43, E51, G01, G21, G28
Suggested Citation: Suggested Citation