New Evidence on the Nexus between Local Banking Competition and Loan Pricing

Abstract

We investigate how local banking competition affects loan pricing using a novel empirical setup. We study the detailed loan pricing information of a large and multiregional operating bank for which the local competitive environment is arguably exogenous due to the federalist setup of the local German banking market. Based on unique data on loans granted to more than 10,000 German firms, we find that a higher degree of local bank competition results in a lower interest margin on loans. We find weak evidence that a close relationship shields the bank’s interest margins from competitive pressure.