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An Estimation of the Inside Bank Premium

  • NEMOTO Tadanobu
  • OGURA Yoshiaki
  • WATANABE Wako

This paper is an empirical examination of the existence of the inside bank premium arising from relationship banking, which is predicted in the extant theoretical models. These models predict that the contracted interest rate of a loan extended by an inside bank when there exist asymmetries between the inside bank and outside banks, such as the information advantage of the inside bank or the implicit insurance and other borrower-specific services exclusively provided by the inside bank, is higher than that without such asymmetries. Our statistical estimations are based on the dataset collected through the survey for small and medium-sized firms in Japan, which were designed to contain the questions about a firm's loan application process, and the agreed-upon loan terms that are crucial to our tests. Our estimations show that such an inside bank premium is 30-50 basis points on average for short-term loans. This is economically significant for the median short-term interest rate of 1.9 %. The subsample regressions show that this premium is more likely to come from the implicit insurance and that this premium is more significant for smaller inside banks in more competitive loan markets.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 11067.

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Length: 56 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:eti:dpaper:11067
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