IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Rules versus discretion in loan rate setting

  • Cerqueiro, Geraldo
  • Degryse, Hans
  • Ongena, Steven

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S1042957310000525
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 20 (2011)
Issue (Month): 4 (October)
Pages: 503-529

as
in new window

Handle: RePEc:eee:jfinin:v:20:y:2011:i:4:p:503-529
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  2. Jalal Akhavein & W. Scott Frame & Lawrence J. White, 2001. "The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring By Large Banking Organizations," Working Papers 01-08, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
  4. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  5. Cole, Rebel A. & Goldberg, Lawrence G. & White, Lawrence J., 2004. "Cookie Cutter vs. Character: The Micro Structure of Small Business Lending by Large and Small Banks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 227-251, June.
  6. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  7. Sumit Agarwal, 2010. "Distance and Private Information in Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
  8. Chan, Yuk-Shee & Greenbaum, Stuart I. & Thakor, Anjan V., 1986. "Information reusability, competition and bank asset quality," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 243-253, June.
  9. Nicola Cetorelli & Philip E. Strahan, 2006. "Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets," Journal of Finance, American Finance Association, vol. 61(1), pages 437-461, 02.
  10. Claessens, Stijn & Laeven, Luc, 2003. "What drives bank competition? some international evidence," Policy Research Working Paper Series 3113, The World Bank.
  11. Hirofumi Uchida & Gregory F. Udell & Wako Watanabe, 2006. "Bank Size and Lending Relationships in Japan," Discussion papers 06029, Research Institute of Economy, Trade and Industry (RIETI).
  12. Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September.
  13. Ernst-Ludwig von Thadden, 1992. "The Commitment of Finance, Duplicated Monitoring and the Investment Horizon," CEPR Financial Markets Paper 0027, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  14. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  15. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  16. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
  17. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  18. Jie Gan & Timothy J. Riddiough, 2008. "Monopoly and Information Advantage in the Residential Mortgage Market," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2677-2703, November.
  19. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, 02.
  20. Robert DeYoung & W. Scott Frame & Dennis Glennon & Daniel P. McMillen & Peter J. Nigro, 2007. "Commercial lending distance and historically underserved areas," Working Paper 2007-11, Federal Reserve Bank of Atlanta.
  21. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  22. Godbillon-Camus, Brigitte & Godlewski, Christophe, 2005. "Credit risk management in banks: Hard information, soft Information and manipulation," MPRA Paper 1873, University Library of Munich, Germany.
  23. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc.
  24. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  25. Brick, Ivan E. & Palia, Darius, 2007. "Evidence of jointness in the terms of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 452-476, July.
  26. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
  27. Wolter Hassink & Michiel Leuvensteijn, 2007. "Measuring Transparency in the Dutch Mortgage Market," De Economist, Springer, vol. 155(1), pages 23-47, March.
  28. Degryse, Hans & Laeven, Luc & Ongena, Steven, 2007. "The Impact of Organizational Structure and Lending Technology on Banking Competition," CEPR Discussion Papers 6412, C.E.P.R. Discussion Papers.
  29. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
  30. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
  31. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  32. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December.
  33. Grunert, Jens & Norden, Lars & Weber, Martin, 2005. "The role of non-financial factors in internal credit ratings," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 509-531, February.
  34. Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.).
  35. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  36. Jose Maria Liberti, 2004. "Initiative, Incentives and Soft Information. How Does Delegation Impact The Role of Bank Relationship Managers?," Finance 0404023, EconWPA.
  37. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
  38. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January.
  39. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
  40. Kallberg, Jarl G. & Udell, Gregory F., 2003. "The value of private sector business credit information sharing: The US case," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 449-469, March.
  41. Elsas, Ralf, 2005. "Empirical determinants of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 14(1), pages 32-57, January.
  42. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-93, June.
  43. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  44. Ernst-Ludwig VON THADDEN, 1998. "Asymmetric Information, Bank Lending and Implicit Contracts : The Winner's Curse," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9809, Université de Lausanne, Faculté des HEC, DEEP.
  45. Berger, Allen N & Frame, W Scott & Miller, Nathan H, 2005. "Credit Scoring and the Availability, Price, and Risk of Small Business Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 191-222, April.
  46. W. Scott Frame & Michael Padhi & Lynn Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," Working Paper 2001-6, Federal Reserve Bank of Atlanta.
  47. Ken S. Cavalluzzo, 2002. "Competition, Small Business Financing, and Discrimination: Evidence from a New Survey," The Journal of Business, University of Chicago Press, vol. 75(4), pages 641-680, October.
  48. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  49. Harvey, A C, 1976. "Estimating Regression Models with Multiplicative Heteroscedasticity," Econometrica, Econometric Society, vol. 44(3), pages 461-65, May.
  50. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
  51. Bester, Helmut, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 201-14, April.
  52. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
  53. D. J. Hand & W. E. Henley, 1997. "Statistical Classification Methods in Consumer Credit Scoring: a Review," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 523-541.
  54. Wenying Jiangli & Haluk Unal & Chiwon Yom, 2008. "Relationship Lending, Accounting Disclosure, and Credit Availability during the Asian Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 25-55, 02.
  55. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  56. Degryse, Hans & Van Cayseele, Patrick, 2000. "Relationship Lending within a Bank-Based System: Evidence from European Small Business Data," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 90-109, January.
  57. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-25, August.
  58. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-88, March.
  59. Machauer, Achim & Weber, Martin, 1998. "Bank behavior based on internal credit ratings of borrowers," CFS Working Paper Series 1998/08, Center for Financial Studies (CFS).
  60. Moshe Kim & Eirik Gaard Kristiansen & Bent Vale, 2005. "What determines banks’ market power? Akerlof versus Herfindahl," Working Paper 2005/8, Norges Bank.
  61. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
  62. Heffernan, Shelagh A., 2002. "How do UK financial institutions really price their banking products?," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 1997-2016, October.
  63. Degryse, Hans & Ongena, Steven, 2007. "The impact of competition on bank orientation," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 399-424, July.
  64. Lars Norden & Martin Weber, 2010. "Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3665-3699, October.
  65. Black, Harold A. & Boehm, Thomas P. & DeGennaro, Ramon P., 2003. "Is there discrimination in mortgage pricing? The case of overages," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1139-1165, June.
  66. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, 04.
  67. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 113-143, January.
  68. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  69. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
  70. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06.
  71. Machauer, Achim & Weber, Martin, 1998. "Bank behavior based on internal credit ratings of borrowers," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1355-1383, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:20:y:2011:i:4:p:503-529. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.