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Risk aversion and bank loan pricing

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  • Camba-Mendez, Gonzalo
  • Mongelli, Francesco Paolo

Abstract

How much of the heterogeneity in bank loan pricing is explained by disparities in banks’ attitude towards risk? The answer to this question is not simple because there are only very weak proxies for gauging the degree of a bank’s risk aversion. We handle this constraint by means of a novel econometric approach that allows us to disentangle the amount of risk faced by banks and the price they charge for holding that risk. Some of our results are aligned with previous studies and confirm that disparities in market power, banks’ funding costs, and banks’ funding risks are reflected in bank lending rates. However, our new modelling framework reveals that the heterogeneity in bank lending rates is also a reflection of the non-negligible disparities in banks’ risk aversion.

Suggested Citation

  • Camba-Mendez, Gonzalo & Mongelli, Francesco Paolo, 2021. "Risk aversion and bank loan pricing," Economics Letters, Elsevier, vol. 200(C).
    • Handle: RePEc:eee:ecolet:v:200:y:2021:i:c:s0165176520304833
    DOI: 10.1016/j.econlet.2020.109723
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    References listed on IDEAS

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    Cited by:

    1. Nguyen, Thanh Cong & Thuy, Tien Ho, 2023. "Geopolitical risk and the cost of bank loans," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Bank loan pricing; Risk aversion;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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