Rules versus Discretion in Loan Rate Setting

TILEC Discussion Paper No. 2007-026

CentER Discussion Paper No. 2007-59

CESifo Working Paper Series No. 2091

47 Pages Posted: 2 Mar 2007 Last revised: 20 Feb 2014

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Geraldo Cerqueiro

Catolica-Lisbon SBE

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

We propose a heteroscedastic regression model to identify the determinants of the dispersion in interest rates on loans granted to small and medium sized enterprises. We interpret unexplained deviations as evidence of the banks' discretionary use of market power in the loan rate setting process. Discretion in the loan-pricing process is most important, we find, if: (i) loans are small and uncollateralized; (ii) firms are small, risky and difficult to monitor; (iii) firms' owners are older, and, (iv) the banking market where the firm operates is large and highly concentrated. We also find that the weight of discretion in loan rates of small credits to opaque firms has decreased somewhat over the last fifteen years, consistent with the proliferation of information-technologies in the banking industry. Overall, our results reflect the relevance in the credit market of the costs firms face in searching information and switching lenders.

Keywords: financial intermediation. loan rates, price discrimination, variance analysis

JEL Classification: G21, L11

Suggested Citation

Degryse, Hans and Cerqueiro, Geraldo and Ongena, Steven R. G., Rules versus Discretion in Loan Rate Setting (September 2007). ; CentER Discussion Paper No. 2007-59; CESifo Working Paper Series No. 2091. Available at SSRN: https://ssrn.com/abstract=965447 or http://dx.doi.org/10.2139/ssrn.965447

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Geraldo Cerqueiro (Contact Author)

Catolica-Lisbon SBE ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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