A Model of the Commercial Loan Rate

Authors

  • MYRON B. SLOVIN,

  • MARIE ELIZABETH SUSHKA

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    • Associate Professor of Economics and Associate Professor of Finance, College of Management, Georgia Institute of Technology.

ABSTRACT

This paper explores the theoretical and empirical determinants of the commercial loan rate charged by commercial banks based on a model of financial intermediary behavior which assumes monopolistic competition in asset and liability markets. The model incorporates the constraint that banks must maintain at least a minimum quantity of bonds in asset portfolios. Equations are estimated on a time series basis to explain the behavior of commercial loan rates over the period 1953 to 1980. The evidence appears consistent with the hypothesis that commercial banks operate in a market characterized by imperfect competition and that they explicitly set loan rates.

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