A NOTE ON AVERAGE INTEREST CHARGES ON BANK LOANS, THE LOAN MIX, AND MEASURES OF COMPETITION

Abstract

IN A RECENT STUDY,1 Charles T. Taylor found a significant relationship between the loan mix and the average loan interest rate at individual banks. The regression analysis also showed a negative relationship between bank size (total deposits) and loan interest rates. In addition, an analysis of variance of the regression residuals revealed significant differences between average loan rates at the banks grouped by type of charter, geographic area, and par status. Other categorical variables often used as measures of competition were found to be insignificant. These variables are the number of banks in the city, metropolitan character, and bank ownership type. However, improper specification of Taylor's regression casts doubt on the reliability of the results. This note has three primary purposes. First, Taylor's model is respecified to avoid the problems of multicollinearity. The respecification and empirical estimation of the model facilitate evaluation of the correctness of Taylor's regression results. Second, the model is also specified to facilitate estimation of the yields on the various types of loans across all Federal Reserve districts. Third, the model is modified to estimate the effects of regional location and bank size on the yields on the various loan types. This modification was accomplished through the use of dummy variables. It permits analysis of the effects and significance of these variables on the overall yield on bank loans while retaining direct estimation of the yields on the individual loan classes. In addition to respecifying the model, this study also differs from Taylor's as to such factors as geographic coverage, year, definition of loan classes, and organization of the data.