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Asymmetric information and price competition in small business lending

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Author Info

  • Liu, Ming-Hua
  • Margaritis, Dimitris
  • Tourani-Rad, Alireza

Abstract

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 2189-2196

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2189-2196

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Lending rate Cost of funds Small and medium enterprises Information asymmetry Error-correction models;

References

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Citations

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Cited by:
  1. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, 09.
  2. Knyazeva, Anzhela & Knyazeva, Diana, 2012. "Does being your bank’s neighbor matter?," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1194-1209.
  3. Valadkhani, Abbas, 2013. "The pricing behaviour of Australian banks and building societies in the residential mortgage market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 133-151.

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