Cross-subsidization of Bad Credit in a Lending Crisis

63 Pages Posted: 4 Apr 2022

See all articles by Nikolaos T. Artavanis

Nikolaos T. Artavanis

Tulane University

Brian Jonghwan Lee

Columbia University - Columbia Business School; Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Margarita Tsoutsoura

Washington University in Saint Louis, John M. Olin Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 10, 2022

Abstract

We study the corporate-loan pricing decisions of a major Greek bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the interest rate and the ``breakeven 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-breakeven-rate (safer) borrowers are charged significant markups, whereas high-breakeven-rate (riskier) borrowers are charged small and sometimes even negative markups. We rationalize this de-facto cross-subsidization of riskier borrowers by safer borrowers through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing.

Keywords: Passthrough, cross-subsidization

JEL Classification: E43, E51, G01, G21, G28

Suggested Citation

Artavanis, Nikolaos T. and Lee, Brian Jonghwan and Panageas, Stavros and Tsoutsoura, Margarita, Cross-subsidization of Bad Credit in a Lending Crisis (March 10, 2022). Available at SSRN: https://ssrn.com/abstract=4054143 or http://dx.doi.org/10.2139/ssrn.4054143

Nikolaos T. Artavanis

Tulane University ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Brian Jonghwan Lee

Columbia University - Columbia Business School ( email )

665 West 130th Street
New York, NY 10027
United States

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Margarita Tsoutsoura (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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