Boon or bane? The impact of loan supply and demand shocks on loan price dispersion

By disentangling simultaneous supply and demand shocks in loan market of an emerging economy, we examine how supply and demand shocks to loans in the banking sector impact loan price dispersion. Our fixed effects panel estimations for the period 2012-2023 in Türkiye show that both positive credit supply and demand shocks are associated with heightened loan rate dispersion at the bank level. Our results are invariant to a number of robustness checks. In terms of potential channels, we document that decreasing competitive structure in the banking industry moderates the impact of credit supply shock on interest rate dispersion, while the erosion in monetary policy credibility amplifies the impact of credit demand shock on interest rate dispersion. Our extended set of analyses indicates that increasing credit supply and demand shocks are associated with declining non-performing and stage 2 loan ratios, implying a lower likelihood of financial stability concerns.