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Do loan interest rate margins and loan fees move in the same direction and are they jointly determined?

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  • Cowling, Marc
  • Yang, Huan

Abstract

A standard UK debt contract has two price components, the interest rate margin which is paid ex post and the up-front fee which is paid ex ante. The interest rate margin reflects risk, whilst the up-front fee is a mechanism for banks to price contract options and to screen borrowers, thus we cannot treat the fee as exogenous in interest rate margins as interest rate margins and fees may be jointly determined. Our empirical evidence shows that the two are indeed jointly determined, but that interest rate margins have a stronger (positive) effect on loan fees than vice-versa.

Suggested Citation

  • Cowling, Marc & Yang, Huan, 2024. "Do loan interest rate margins and loan fees move in the same direction and are they jointly determined?," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012837
    DOI: 10.1016/j.frl.2023.104911
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    References listed on IDEAS

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    1. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Loan interest rate margins; Loan fees; Small firms; Loan guarantee schemes;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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