Rules versus discretion in loan rate setting / Geraldo Cerqueiro, Hans Degryse and Steven Ongena Cerqueiro, Geraldo

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Cerqueiro, Geraldo
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Journal of Financial Intermediation
Interest rates.; Bank loans -- Prices and rates; Commodity & service prices
To link to full-text access for this article, visit this link: Byline: Geraldo Cerqueiro (a), Hans Degryse (b), Steven Ongena (c) Keywords: Financial intermediation; Loan rates; Price discrimination; Heteroscedastic regression Abstract: Loan rates for seemingly identical borrowers often exhibit substantial dispersion. This paper investigates the determinants of the dispersion in interest rates on loans granted by banks to small and medium sized enterprises. We associate this dispersion with the loan officers' use of "discretion" in the loan rate setting process. We find that "discretion" is most important if: (i) loans are small and unsecured; (ii) firms are small and opaque; (iii) the firm operates in a large and highly concentrated banking market; and (iv) the firm is distantly located from the lender. Consistent with the proliferation of information-technologies in the banking industry, we find a decreasing role for "discretion" over time in the provision of small credits to opaque firms. While widely used in the pricing of loans, "discretion" plays only a minor role in the decisions to grant loans. Author Affiliation: (a) Universidade Catolica Portuguesa, School of Economics and Management, Palma de Cima, 1649-023 Lisbon, Portugal (b) CentER - Tilburg University, TILEC and CESifo, Department of Finance, PO Box 90153, NL 5000 LE Tilburg, The Netherlands (c) CentER - Tilburg University and CEPR, Department of Finance, PO Box 90153, NL 5000 LE Tilburg, The Netherlands Article History: Received 15 December 2009
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