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Heterogeneity in loan pricing: the role of bank capital

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In this article, we examine the role of bank characteristics in shaping loan pricing decisions. We evaluate the pricing differentials across banks lending to the same firm and find that lower levels of bank capital are associated with lower interest rates. Banks that are better capitalized compared to their historical average seem to be more conservative in loan pricing, offering higher loan spreads than the other banks lending to the same firm. However, bank capital does not seem to exert a screening incentive in the case of loans to riskier, smaller firms or firms with only two relationships. The results are stronger in the aftermath of the euro area sovereign debt crisis.
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