Credit Market Regulations and Banks’ Loan Pricing

We provide the first evidence of the effects of credit market regulations on the cost of bank loans. Using a sample of 3,706 banks in 154 countries over the period 2002-2020, we find robust evidence that the liberalisation of credit market regulations is associated with lower loan prices. The decline in loan prices is more pronounced in low- and middle-income countries. Digging deeper into credit market regulations, we find that regulations that promote private-sector borrowings relative to government borrowings and relax interest rate controls help to reduce the cost of loan financing. Our results are robust to using an alternative measure of credit market regulations and clustering standard errors, to controlling for banks’ own idiosyncratic risks, and to mitigating endogeneity. In general, our findings imply that banks consider the liberalisation of credit market regulations as a risk-reduction factor and charge lower on loans for bearing lower downside risks