Risk-based pricing in competitive lending markets

Carola Müller, Ragnar Juelsrud, Henrik Andersen

We use unique data on banks' private risk assessments of corporate borrowers to quantify how competition among banks affect the risk sensitivity of interest rates in the Norwegian credit market. We show that an increase in competition makes corporate lending rates less sensitive to banks' own assessment of borrower risk and this is more pronounced in market segments with higher degree of asymmetric information. Our results are driven by banks with low franchise values, outlining a novel channel of how the competition-fragility nexus can operate.

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Year of publication:	[2021]
Authors:	Müller, Carola ; Juelsrud, Ragnar Enger ; Andersen, Henrik
Publisher:	Oslo : Norges Bank
Subject:	Banking competition \| market power \| risk pricing \| financial stability \| Marktmacht \| Market power \| Bank \| Theorie \| Theory \| Wettbewerb \| Competition \| Preiswettbewerb \| Price competition \| Kreditgeschäft \| Bank lending \| Kreditmarkt \| Credit market \| Marktstruktur \| Market structure