Interest rates on bank loans are widely dispersed. At any given moment, this dispersion is chiefl y related to both the credit policy followed by each bank and risks underlying operations, particularly credit risk.
Santos (2013)
1
identifi es a number of fi rm characteristics that are likely to induce discrimination in interest rate setting, controlling for the loan characteristics. In particular, this article shows that, ceteris paribus
, larger enterprises and exporting companies obtain loans at signifi cantly lower rates. However, the wide interest rate dispersion on loans to large enterprises or exporting companies suggests that banks’ lending policy is very heterogeneous (Chart 1).
This box provides an in-depth analysis of factors explaining interest rate dispersion of new loans to non-
-fi nancial corporations with a view to isolating the effect of heterogeneity in banks’ practices. Results are based on a regression analysis in which the dependent variable is the interest rate, including as explanatory variables several blocks of variables. All models include a dummy variable taking value one for bank
i and zero for the remaining banks. The estimated coeffi cient associated with this variable, which is the focus of the analysis in this box, is the average difference between interest rate applied by bank
i and those applied by the remaining banks, controlling for loan and corporate characteristics. More specifi cally, the analysis is based on the results of the following four models: model (1) that includes only the dummy variable for the bank; model (2) that also includes the loan characteristics (amount, maturity and an indicator of existence (or absence) of collateral, in line with Santos (2013)); model (3) that includes observable characteristics of companies, which are related to their ability to meet their debt commitments in the future (profi tability, growth, self-fi nancing capacity, export propensity, size, age and sector of activity) as well as characteristics related to the nature of their credit relationships with the banking system (number of credit relationships, duration of the relationship with the bank and default); fi nally, model (4) that was estimated with fi xed effects at corporate level, which means that non-observable, fi rm-specifi c and time-invariant characteristics are also controlled
(e.g.
quality management).
Data used in this study are based on information compiled in the scope of monetary and fi nancial statistics regarding interest rates on new loans to non-fi nancial-corporations between June 2012 and June
2013 (which corresponds to over 500 000 observations).
2
In the regression analysis, only data on loans to resident private companies are taken into account.
Models (1) to (4) were repeatedly estimated, varying only the dummy related to the bank. Therefore, a series with the coeffi cients associated with that dummy variable was obtained for each model,
i.e.
a series for interest rate differentials of each bank vis-à-vis
the average. The empirical distribution of the series obtained with each model is shown in Chart 2. The distribution of differentials obtained with model (1) shows the marked dispersion of interest rates applied by banks to loans to non-fi nancial corporations in the period under review. Results presented also show that dispersion is successively reduced when loan (model (2)) and corporate (models (3) and (4)) characteristics are controlled. The more substantial change in distribution is in model (4), where the effect of corporate non-observable characteristics is controlled (fi xed effects model).
The marked dispersion in the distribution of banks’ interest rate differentials, even when loan and corporate characteristics are controlled, may be partly due to the fact that banks, from the onset, select customers with different risk profi les. With a view to controlling this selection effect on banks’ interest
1
See Santos, C. (2013), “Bank interest rates on new loans to non-fi nancial corporations – one fi rst look at a new set of micro data”, Banco de Portugal,
Financial Stability Report - May 2013
.
2
This includes loans granted by banks that, on a monthly basis, have granted new loans to the amount of at least
EUR 50 million. The concept of new credit operation excludes operations associated with loan restructuring and debt consolidation when there is a default.
1
33

observable and non-observable characteristics, which determine credit risk. By controlling this selection effect, interest rate dispersion declines when the effect of loan and (mainly) corporate characteristics is controlled. However, even if these factors are controlled, interest rates applied by the various banks continue to be signifi cantly dispersed, which, in part, may be due to the fact that variables associated with debtor risk explicitly included in the models are not enough to control risk in prospective terms as perceived by banks. Furthermore, this dispersion should be related to the fact that banks obtain their funding at different costs, which is shown, for instance, by their different return on deposits. Finally, it should be noted that these results seem to be in line with literature that states the importance of effects related to the existence of information costs, which explains the persistence of price differentials, even in the case of homogeneous products and in competitive markets.
3
1
35
3
See, for instance, Martín, Saurina and Salas (2005), “Interest rate dispersion in deposit and loan markets”,
Banco de España,
Working Paper No 0506
.