Bank loan rate indexation in the Eurocurrency market
Journal
Journal of International Money and Finance
Date Issued
1987
Author(s)
DOI
10.1016/0261-5606(87)90007-6
Abstract
This paper demonstrates that commercial bank indexation of the interest rate charged on loans to developing countries through the Eurocurrency market has differential effects on prime and non-prime borrowers. If loan contracts are indexed, the interest rate adjustment to non-prime borrowers, following an increase in the cost of funds to the bank, will be greater than that which a profit-maximizing bank would desire. As a result, it is proposed that the proportion of loan commitments drawn down by non-prime borrowers declines when the cost of bank funds rises. An analysis with data from developing-country borrowings confirms this proposition. © 1987.