Loan Pricing: Do Borrowers Benefit from Cost-Efficient Banking?

Abstract

This study examines the loan-pricing behavior of German banks for a large variety of retail and corporate loan products. We find that a bank’s operational efficiency is priced in bank loan rates and alters interest-setting behavior. Specifically, we establish that a higher degree of operational efficiency leads to lower loan markups, which makes prices more competitive and smoothes the setting of interest rates. By employing state-of-the-art stochastic frontier efficiency measures to capture a bank’s operational efficiency, we take a look at the bank customers’ perspective and demonstrate the extent to which bor-rowers benefit from cost-efficient banking.

Keywords: interest rate pass-through models, error correction models, bank efficiency, cost efficiency, stochastic frontier analysis

JEL Classification: G21, G28