Rules versus Discretion in Loan Rate Setting

G.M. Cerqueiro, H.A. Degryse, S. Ongena

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages42
Volume2007-59
Publication statusPublished - 2007

Publication series

NameCentER Discussion Paper
Volume2007-59

Fingerprint

Loan rates
Rules versus discretion
Loans
Discretion
Market power
Credit markets
Deviation
Loan pricing
Proliferation
Small and medium-sized enterprises
Banking industry
Interest rates
Owners
Banking
Regression model
Credit
Costs

Keywords

  • financial intermediation
  • loan rates
  • price discrimination
  • variance analysis

Cite this

Cerqueiro, G. M., Degryse, H. A., & Ongena, S. (2007). Rules versus Discretion in Loan Rate Setting. (CentER Discussion Paper; Vol. 2007-59). Tilburg: Finance.
Cerqueiro, G.M. ; Degryse, H.A. ; Ongena, S. / Rules versus Discretion in Loan Rate Setting. Tilburg : Finance, 2007. (CentER Discussion Paper).
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Cerqueiro, GM, Degryse, HA & Ongena, S 2007 'Rules versus Discretion in Loan Rate Setting' CentER Discussion Paper, vol. 2007-59, Finance, Tilburg.

Rules versus Discretion in Loan Rate Setting. / Cerqueiro, G.M.; Degryse, H.A.; Ongena, S.

Tilburg : Finance, 2007. (CentER Discussion Paper; Vol. 2007-59).

Research output: Working paperDiscussion paperOther research output

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AB - 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.

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Cerqueiro GM, Degryse HA, Ongena S. Rules versus Discretion in Loan Rate Setting. Tilburg: Finance. 2007. (CentER Discussion Paper).