Explaining Loan Rate Differentials between Small and Large Companies: Evidence from an Explorative Study in Switzerland

Abstract

The lending-rate differentials between loans to small and large companies are striking. According to several studies, these disparities of loan rates are primarily a result of a lower informational efficiency at small companies. This study examines to what extent such differences in loan rates are caused not only by informational inefficiencies, but also by operational costs and the borrower's negotiation power. By using unique, hand-collected data from the pricing-structure models of 15 Swiss regional banks, we provide new empirical evidence that operational costs are a key factor in explaining differences in lending rates between small and large enterprises.