The Provision of Services, Interest Margins and Loan Pricing in European Banking

25 Pages Posted: 12 Jan 2007 Last revised: 13 Mar 2014

See all articles by Amine Tarazi

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Emmanuelle Nys

Université de Limoges, LAPE

Philippe Rous

Université de Limoges, LAPE

Date Written: December 1, 2006

Abstract

This paper assesses the implications on bank interest margins of the expansion into non-traditional fee-based activities in European banking. We use a sample of 602 European commercial and cooperative banks from 1996 to 2002 and consider the total income shares of trading income and commission and fee income as measures of product diversification to explore loan pricing. Our results show that a higher income share from commission and fee activities is associated with lower margins and lower lending rates but that there is no link with trading activities. For banks exhibiting a higher share of commission and fee income there is a weaker link between the rate they charge on loans and borrower default risk. The hypothesis that banks use loans as a loss leader altering default screening and monitoring activities and consequently risk pricing cannot be rejected.

Keywords: bank, interest income, non-interest income, interest margin, lending

JEL Classification: G21

Suggested Citation

Tarazi, Amine and Lepetit, Laetitia and Nys, Emmanuelle and Rous, Philippe, The Provision of Services, Interest Margins and Loan Pricing in European Banking (December 1, 2006). Available at SSRN: https://ssrn.com/abstract=955852 or http://dx.doi.org/10.2139/ssrn.955852

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Felix Eboue
BP 3127
Limoges Cedex 1, 87031
France
+33555149213 (Phone)

HOME PAGE: http://www.unilim.fr/lape/

Emmanuelle Nys

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Philippe Rous

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

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