"The Determinants of Bank Loan Pricing"
Working paper,
March
1996
Publication type: Working paper
Research Archive Topic: Capital Markets and Investments
Abstract
A new dataset and a nonparametric methodology permit a detailed look at the many factors which affect the pricing of bank loans, clarifying the weight and significance of each. The data include the lending banks' internal measure of each loan's default risk, incorporating their private information about the borrower as well as their knowledge of each loan's covenants and security structure. A variable for loan renewal and a study of repeat borrowing by the same companies offers new insight into the pricing impact of bank relationships. The most surprising variable is also the most significant: whether the loan is priced against Prime Rate or a market index such as Libor. Controlling for the difference in level among such benchmarks and for all the other explanatory variables, Prime-based borrowers pay about 140 basis points more. This remarkable anomaly persists even when a choice of benchmarks is offered to the same borrower.
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