Working Paper: NBER ID: w29850
Authors: Nikolaos Artavanis; Brian Jonghwan Lee; Stavros Panageas; Margarita Tsoutsoura
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: Loan Pricing; Financial Crisis; Cross-Subsidization; Breakeven Rates; Corporate Finance
JEL Codes: E43; E44; G01; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrower risk characteristics (G51) | loan pricing decisions (G19) |
| regulatory reform (L51) | loan pricing behavior (G19) |
| loan-level breakeven rates (E43) | actual interest rates (E43) |
| loan pricing decisions (G19) | borrower ability to pay (G51) |
| safer borrowers (G51) | significant markups above breakeven rates (D43) |
| riskier borrowers (G21) | zero or negative markups (D41) |
| bank's limited access to capital markets (G21) | pricing strategy reflecting borrowers' ability to pay (G21) |