Working Paper: CEPR ID: DP6450
Authors: Geraldo Cerqueiro; Hans Degryse; Steven Ongena
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 Codes: G21; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger loans (G51) | More objective pricing (G13) |
| Larger loans (G51) | Constrain banks' ability to price discriminate (D49) |
| Borrower risk and opaqueness (G21) | Larger unexplained dispersion of loan rates (G21) |
| Discretion (Y60) | Related to switching costs firms face (L14) |
| Age of firm owner (L26) | Discretion in loan pricing (G21) |
| Concentrated banking markets (G21) | Significant discretion in loan pricing (G21) |
| High liquidity (G19) | Significant discretion in loan pricing (G21) |
| Advances in information technology (L86) | Decrease in discretion in small credits to opaque firms (G21) |
| Costs of searching for information and switching lenders (G21) | Significant in credit market (G19) |