Abstract
This study examines the loan-pricing behavior of German banks for a large variety of retail and corporate loan products. We find that a bank’s operational efficiency is priced in bank loan rates and alters interest-setting behavior. Specifically, we establish that a higher degree of operational efficiency leads to lower loan markups, which makes prices more competitive and smoothes the setting of interest rates. By employing state-of-the-art stochastic frontier efficiency measures to capture a bank’s operational efficiency, we take a look at the bank customers’ perspective and demonstrate the extent to which bor-rowers benefit from cost-efficient banking.
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