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Loan spreads have decreased sharply since 2012, but kept a high dispersion


Economics in a picture: Loan spreads have decreased sharply since 2012, but kept a high dispersion

The average spread on loans to firms has decreased sharply since 2012, due to lower funding costs for banks, increasing competition in the credit market and a progressive improvement in economic activity. Loan spread dispersion also decreased, but was kept at a high level. Borrowers’ risk and loan characteristics are the main determinants of this dispersion.

This dispersion is also present when we compare interest rates applied by different banks on loans with similar characteristics granted to the same firm. Using detailed data on firms, banks and loans granted between 2012 and 2019, a regression analysis suggests that there is a positive relation between banks’ regulatory capital and spreads on loans to a given firm. This result, which nonetheless applies only to firms with a rating better than the median, firms in all size classes except micro firms and firms with more than two banking relationships and only in the period after the euro area sovereign debt crisis, is consistent with the idea that better capitalized banks screen and monitor more intensively their clients. 


For more details, see Bonfim, Farinha and Queiró (2021) “Heterogeneity in loan pricing: the role of bank capital”, published in the Banco de Portugal Economic Studies, vol. VII, 3.


Prepared by Diana Bonfim, Luísa Farinha and Leonor Queiró. The analyses, opinions and results expressed herein are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.


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