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Cross-subsidization of Bad Credit in a Lending Crisis

Author

Listed:
  • 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.

Suggested Citation

  • Nikolaos Artavanis & Brian Jonghwan Lee & Stavros Panageas & Margarita Tsoutsoura, 2022. "Cross-subsidization of Bad Credit in a Lending Crisis," NBER Working Papers 29850, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29850
    Note: AP CF EFG ME
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G3 - Financial Economics - - Corporate Finance and Governance

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