Economics in a picture
Bank loans to firms are overpriced in the short-run and underpriced in the medium to long-run if loan origination is unchanged
The spreads of loans to firms originated between September 2018 and December 2019 were on average more than sufficient to cover loans’ expected credit losses, operating costs, and the cost of equity in the short-run – loans were overpriced. In the medium to long-run, however, those loans were on average underpriced. Banks’ equity holders stand to earn a return lower than 8 percent – the estimated cost of equity, – especially if banks keep on originating loans as in the sample period. Underpricing in the medium to long-run is mitigated if we take into account only the loans originated during 2019.
Loans with maturity longer than a year, loans to the construction, real estate, transportation and storage sectors, and loans to high credit risk borrowers are, on average, underpriced.
Prepared by Márcio Mateus and Tiago Pinheiro. The analyses, opinions, and findings expressed above are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
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