Tacit collusion among dominant banks: Evidence from round-yard loan pricing

Abstract

While there is no apparent reason for loan spreads to cluster at certain numbers, we find that approximately 70 % of bank loans have round-yard spreads (i.e., multiples of 25 basis points). We hypothesize that dominant banks implicitly collude using round yards as focal pricing points when negotiating with borrowers. Tacit collusion leads to higher spreads and total costs of round yard priced loans than of non-round yard priced loans. Consistent with our tacit collusion hypothesis, dominant banks round up loans to multiple yards rather than rounding them down. Moreover, round-yard pricing is more prevalent among lower-quality and nonrepeat borrowers.