Credit market regulations and bank loan pricing

Abstract

While loan pricing is a crucial factor determining economic growth, the literature lacks evidence on the impact of credit market regulations on loan prices. Using a panel of 139 economies from 2002 to 2020, we find that liberalising credit regulations, particularly credit to the private sector and the controls of interest rates, reduces the cost of bank loans. Bank ownership does not reveal itself as an important driver of loan prices. Delving into the mechanisms behind our findings, we find that liberalising credit market regulations reduces liquidity shortage, economic uncertainty, as well as economic risk, which enables banks to charge lower on loans because they face lower downside risks. Our empirical findings offer important policy implications to policymakers, especially those in emerging/developing countries because the impact of credit market regulations on loan prices is more pronounced in those economies.