Bank Loan Interest Research Articles

A factor analysis approach to measuring European loan and bond market integration

By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.

A Factor Analysis Approach to Measuring European Loan and Bond Market Integration

By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the corporate sector across the euro area. Our sample of 828 bond issues suggests that integration of the primary euro-denominated bond market is complete; there is evidence of α -convergence, β -convergence, strong factor convergence, and absence of σ -convergence. In contrast, the market for bank loans remains segmented albeit at various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and long-term small loans have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the evolution of short-term small loan rates is still affected by country-specific dynamic factors. These working capital type of loans are more susceptible to information problems and, therefore, possibly to distortions in loan pricing. There are few signs that bank loan rates are becoming more uniform with time.

Hidden loan losses, moral hazard and financial crises

This paper introduces two methods of hiding loan losses and analyzes how they affect a bank's loan interest income, payments on deposits, liquidity and moral hazard. The analysis reveals that a hiding method represents a Ponzi scheme. Contrary to classic theory, e.g. Diamond (1984), moral hazard may arise even though a bank's loan portfolio is diversified. Alternative instruments to eliminate hiding are investigated. Under specific circumstances, a Ponzi scheme may provide a socially optimal method to create liquidity and prevent a failure of a solvent but illiquid bank.

Search Costs, Market Structure and Interest Rate Dispersion

Panel data on bank loan and deposit interest rates reveal that dispersion of interest rates within geographic markets increases with the number of banks in the market and decreases with the density of branches and size of the market. It also reveals that dispersion increases with absolute product specific inflation and is higher for bank products of longer maturity and of smaller average volume per transaction. The evidence is consistent with theories of price formation under consumers' search costs. The paper is one of the very few to test theories of price formation under product information differentiation with market structure data.

Identification of vector AR models with recursive structural errors using conditional independence graphs

In canonical vector time series autoregressions, which permit dependence only on past values, the errors generally show contemporaneous correlation. By contrast structural vector autoregressions allow contemporaneous series dependence and assume errors with no contemporaneous correlation. Such models having a recursive structure can be described by a directed acyclic graph. We show, with the use of a real example, how the identification of these models may be assisted by examination of the conditional independence graph of contemporaneous and lagged variables. In this example we identify the causal dependence of monthly Italian bank loan interest rates on government bond and repurchase agreement rates. When the number of series is larger, the structural modelling of the canonical errors alone is a useful initial step, and we first present such an example to demonstrate the general approach to identifying a directed graphical model.

ANALYZING THE COST OF DEBT FOR SMALL BUSINESS

SummaryThe available empirical evidence provides mixed views of small businesses' relative bankruptcy risk. The difference between Churchill and Lewis' findings and SBA's and Kirchhoffs' may well lie in the difference in definition of firm “size” used. Risk is not evenly spread; the smallest businesses seem to be less risky than the intermediate size businesses. Yet, Churchill and Lewis' actual loss evidence suggests that small business risk is only marginally greater than for large businesses, the loss rate is still equivalent to less than one half of one percent.The assumptions that lenders will adjust the amount of debt they allow small business clients rather than the interest rate is not rejected by this evidence. In fact, the much higher profitability of the small business department reported by Churchill and Lewis suggests that the bank's loan interest rates are more than high enough to cover loss risk and fixed costs, and borrowers provide profitable deposits. Thus, the logic of my utility theory hypothesis provides a reasonable explanation for the relatively higher debt levels of small firms compared to large firms. But, then the Kirchhoffs' findings cast some doubt on whether small firms actually have higher debt levels. None of these findings justify the 2.75 percent interest rate spread allowed by SBA.

Bank loan commitments and interest rate volatility

Bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained. The partial takedown phenomenon, which is both distinctive and vexatious, is considered in detail. Finally, estimates of the value of U.S. bank loan commitments and their sensitivity to interest rate changes are provided.

A NOTE ON AVERAGE INTEREST CHARGES ON BANK LOANS, THE LOAN MIX, AND MEASURES OF COMPETITION

IN A RECENT STUDY,1 Charles T. Taylor found a significant relationship between the loan mix and the average loan interest rate at individual banks. The regression analysis also showed a negative relationship between bank size (total deposits) and loan interest rates. In addition, an analysis of variance of the regression residuals revealed significant differences between average loan rates at the banks grouped by type of charter, geographic area, and par status. Other categorical variables often used as measures of competition were found to be insignificant. These variables are the number of banks in the city, metropolitan character, and bank ownership type. However, improper specification of Taylor's regression casts doubt on the reliability of the results. This note has three primary purposes. First, Taylor's model is respecified to avoid the problems of multicollinearity. The respecification and empirical estimation of the model facilitate evaluation of the correctness of Taylor's regression results. Second, the model is also specified to facilitate estimation of the yields on the various types of loans across all Federal Reserve districts. Third, the model is modified to estimate the effects of regional location and bank size on the yields on the various loan types. This modification was accomplished through the use of dummy variables. It permits analysis of the effects and significance of these variables on the overall yield on bank loans while retaining direct estimation of the yields on the individual loan classes. In addition to respecifying the model, this study also differs from Taylor's as to such factors as geographic coverage, year, definition of loan classes, and organization of the data.