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The expansion of services in European banking: Implications for loan pricing and interest margins

Author

Listed:
  • Laetitia Lepetit

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

  • Emmanuelle Nys

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

  • Philippe Rous

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

  • Amine Tarazi

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

Abstract

Our study of 602 European banks over 1996-2002 investigates how the banks' expansion into fee-based services has affected their interest margins and loan pricing. We find that higher income share from commissions and fees is associated with lower margins and loan spreads. The higher the commission and fee income share, moreover, the weaker the link between bank loan spreads and loan risk. The latter result is consistent with the conjecture that banks price (or misprice) loans to increase sales of other services. That loss leader (or cross selling) hypothesis has implications for bank regulation and competition with (non-bank) lenders.

Suggested Citation

  • Laetitia Lepetit & Emmanuelle Nys & Philippe Rous & Amine Tarazi, 2008. "The expansion of services in European banking: Implications for loan pricing and interest margins," Post-Print hal-00844822, HAL.
  • Handle: RePEc:hal:journl:hal-00844822
    DOI: 10.1016/j.jbankfin.2007.09.025
    Note: View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-00844822
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank; Interest income; Non-interest income; Interest margin; Lending;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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