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Why Do Firms Pay Different Interest Rates on Their Bank Loans?

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Abstract

We document significant variation in interest rates among similar commercial and industrial loans using confidential supervisory data on the largest US banks. This dispersion does not appear to be due to risk. We rationalize the data using a search cost model and find that search costs are highest for smaller and riskier borrowers and lower for public firms, consistent with predictable differences in the costs of screening and monitoring. We find that search costs are substantial. Over a third of firms behave as if they do not comparison shop; half of all firms appear to only obtain two quotes before picking a lender; while the remaining firms behave as if they search widely.

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  • Mary Amiti & Anil K. Kashyap & Anna Kovner & David E. Weinstein, 2026. "Why Do Firms Pay Different Interest Rates on Their Bank Loans?," Working Paper 26-03, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:102827
    DOI: 10.21144/wp26-03
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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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