Professional Documents
Culture Documents
Chapter 4
Lender Borrower Relationship
Imagine
a set of twins that applies for a bank loan
If twins are fully identical in all respects (same sex,
profession, street address, etc.)
The applications are made online through the same
automated system
the twins should receive the same loan rate
as both the inputs in the credit application
and the models processing these inputs
are identical
experience
bargaining ability
uncertainty regarding the costumers prospects
soft information
eccentricities
the color of the applicants jacket
the loan officers mood
weather conditions and/or many other personal factors
Rules
Discretion
Loan Rates
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Rules
Standardization
Level
Weight of Objective
Information
Discretion
Min.
This Paper
Uses a heteroscedastic regression model to
assess the determinants of the importance
of Rules and Discretion on contracted
loan rates
Loan rates should reflect some latent
combination of objective (rules) and subjective
(discretion) criteria
Heteroscedastic model analyzes how the
predictive power of a linear loan-pricing model
changes with given firm, market and loan
characteristics
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Main Results
The importance of discretion
decreases with:
Loan and firm size
Prime rate
increases with:
Borrower opaqueness (e.g., poor credit history)
Distance between firm and lender
Age of firms owner
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Study
R2
# Var. # Obs.
15%
32
1,389
10%
22
371
11%
80
766
22%
83
15,044
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I. Well, It Depends....
Heterogeneity in Loan Pricing Models
Sample split regressions (by loan size)
From Degryse & Ongena (JF 2005)
# Obs.
R2
5,850
0.01
1,850
0.67
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This Crisis?
Lower R on acceptance model for US subprime
versus prime loans
DellAriccia, Igan & Laeven (JMCB Forth)
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II. Methodology
Econometric Model
Heteroscedastic regression model:
Mean equation: yi = 'Xi + ui
Variance equation: i2= exp(Zi)
Extreme cases:
Rules: R2 of mean equation 1
Discretion: R2 of mean equation 0
Model estimated by MLE (normality assumption)
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Loan Rate
Pooling
Equilibrium
Loan Rate
Loan Rate
Loan Rate
Loan Rate
Loan Size
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Loan Rate
Rules
Loan Size
25
Loan Rate
Discretion
Rules
Loan Size
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Loan Rate
Discretion
Rules
Loan Size
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<0
Loan Rate
<0
Loan Size
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=0
Loan Rate
<0
Loan Size
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III. Data
Datasets used:
1993, 1998 and 2003 SSBF
Allows for a temporal analysis of loan pricing
practices
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Relationship characteristics
Competition / Location measures
Other controls: SIC codes, regions, lender type
R2 of mean equation: 25%
Not particularly low & not due to low number of regressors
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Relationship characteristics
Competition / Location measures
Other controls: SIC codes, regions, lender type
R2 of mean equation: 25%
Not particularly low & not due to low number of regressors
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Reinganum (JPE 1979), MacMinn (JPE 1980), Varian (AER 1980), Baye and Morgan
(AER 2001)
Firm-bank distance
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47
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S.e. ()
Ln(Loan Amount)
-0.27 ***
0.02
-0.18 **
0.08
-0.24 ***
0.09
0.39 ***
0.13
-0.34 ***
0.13
-0.25 ***
0.09
-0.16 **
0.07
-0.12 **
0.05
0.10
0.08
0.18 **
0.09
Ln(Firm-Bank Distance)
0.10 ***
0.02
Number of observations
1,425
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Ln(Firm-Bank Distance)
< 2 miles: positive
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Table 5
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V. Conclusions
Heteroscedastic model identifies determinants of
unexplained dispersion of loan rates (discretion)
Discretion increases with...
Borrower opaqueness (Switching costs)
Public information about the firm
And decreases in...
Loan size (Information search costs)
Prime Rate
Discretion has decreased over the last 15 years for
small loans to opaque firms
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