Loan spreads over the credit cycle

Using novel bank-firm level credit registry data along with financial statements of all incorporated firms, this paper investigates firm heterogeneity in the evolution of loan spreads over the credit cycle in Türkiye. Our results show that small- and medium-sized enterprises (SMEs) and firms that are riskier and more prone to financial frictions pay higher loan interest rates. The results also reveal that loan spreads of these firms decrease and converge to the spreads of large and financially sound firms during expansion periods. Our results suggest that the significant role of firm riskiness on loan spreads weakens during expansion periods. On the other hand, SME loan spreads rise more than those of larger firms during periods of credit tightening. However, this is the case for loans extended by private banks but not state-owned banks. Our findings highlight the mitigating role of state-owned banks that can shield SMEs from asymmetric deterioration in their lending conditions during credit contractions and lend support to policymakers' prudent approaches over the credit cycle.