Why Do Firms Pay Different Interest Rates on Their Bank Loans?
Abstract
We document significant variation in interest rates among similar commercial and industrial loans using confidential supervisory data on the largest US banks. This dispersion does not appear to be due to risk. We rationalize the data using a search cost model and find that search costs are highest for smaller and riskier borrowers and lower for public firms, consistent with predictable differences in the costs of screening and monitoring. We find that search costs are substantial. Over a third of firms behave as if they do not comparison shop; half of all firms appear to only obtain two quotes before picking a lender; while the remaining firms behave as if they search widely.
Fields of Study & Subjects
Banking stability
regulation
efficiency
Corporate Finance and Governance
Credit Risk and Financial Regulations
Publication details
- Journal / source
- Federal Reserve Bank of Richmond Working Papers
- Volume
- 26
- Issue
- 03
- Pages
- 1–42
- Publication date
- 26 February 2026
- Language
- EN