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Risk-based pricing in competitive lending markets

Author

Listed:
  • Henrik Andersen
  • Ragnar E Juelsrud
  • Carola Müller

Abstract

We use unique relationship-level data which includes banks' private risk assessments of corporate borrowers to quantify how competition among banks affects the risk sensitivity of interest rates in the corporate credit market. We show that an increase in competition makes corporate lending rates less sensitive to banks' own assessment of borrower probability of default and this is more pronounced in market segments with higher degree of asymmetric information. Our results are driven by banks with low franchise values, outlining a novel channel of how the competition-fragility nexus can operate.

Suggested Citation

  • Henrik Andersen & Ragnar E Juelsrud & Carola Müller, 2024. "Risk-based pricing in competitive lending markets," BIS Working Papers 1169, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1169
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    References listed on IDEAS

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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