PRICE DISCRIMINATION, REGIONAL LOAN RATES, AND THE STRUCTURE OF THE BANKING INDUSTRY*

Abstract

THE SCANT ATTENTION given regional interest rate variations as large as one and one-half per cent is puzzling, especially since discount rate changes of one-half, or even one-quarter per cent can generate heated discussion. Of course, regional variations in average loan rates are not prima facie evidence of imperfect credit markets. Variations are desirable to the extent that they reflect regional differences in the types of borrowers, just as interest rates on loans with different degrees of risk should vary. However, nonhomogeneity of borrowers among regions cannot entirely explain regional bank rate variations. Regional differences in credit market conditions are as important as borrower characteristics in explaining regional rate variations. This paper examines the relationship between regional bank rates, discrimination against small borrowers, and the structure of commercial banking markets in the United States. Winfield Riefler was perhaps the first to emphasize the existence of regional rate differentials. When the rates applying to the bulk of the loans in any given city are compared, there is no great variation according to the type of loan on which rates are quoted. Between cities the variations in these rate levels are marked.' While Riefler and others have attempted to explain regional differentials by the structure of credit markets, only Schweiger and McGee and Edwards have had any empirical success.2 Schweiger and McGee found that interest rates in small towns are a function of the number of banks. Edwards' study shows that banking concentration influences rates in standard metropolitan areas, SMA's.3 The following section describes the product and geographic boundaries of bank-loan markets and the effects of discrimination on resource allocation. Regressions of loan rates to small borrowers in SMA's are presented in Section II. Loan rates are a parabolic function of average bank size, statistically the most significant bank structure variable. The data also indicate a significant