Do loan interest rate margins and loan fees move in the same direction and are they jointly determined?

Abstract

A standard UK debt contract has two price components, the interest rate margin which is paid ex post and the up-front fee which is paid ex ante. The interest rate margin reflects risk, whilst the up-front fee is a mechanism for banks to price contract options and to screen borrowers, thus we cannot treat the fee as exogenous in interest rate margins as interest rate margins and fees may be jointly determined. Our empirical evidence shows that the two are indeed jointly determined, but that interest rate margins have a stronger (positive) effect on loan fees than vice-versa.