Bank interest margins under information asymmetry and centralized vs. decentralized loan rate decisions: a two-stage option pricing model

Authors:
Jyh-Horng Lin;Jyh-Jiuan Lin;Rosemary Jou
Affiliations:
Graduate Institute of International Business, Tamkang University, Tamsui, Taipei County, Taiwan;Department of Statistics, Tamkang University, Tamsui, Taipei County, Taiwan;Graduate Institute of Management Sciences, Tamkang University, Tamsui, Taipei County, Taiwan
Venue:
WSEAS Transactions on Information Science and Applications
Year:
2009

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Abstract

The behavior of outside portfolio managers of large money-center banks as analyzed to date is silent. In a centralized loan portfolio construction with decentralized loan portfolio management, changes in the bank's degree of capital market imperfection have direct effects on the bank's interest margin through the centralized as well as the decentralized loan rate determinations. We use a two-stage model of option-based analysis to study how information asymmetry and optimal bank loan rates relate to one another. We find that the decentralized loan rate managed by the outside loan manager is positively related to the bank's degree of capital market imperfection. The centralized loan rate managed by the bank is positively related to its degree of capital market imperfection under strategic complements, but negatively under strategic substitutes.