The Prime Premium: Is Relationship Banking Too Costly for Some?

The most important determinant of bank loan pricing is not borrower risk or other conventional variable but whether the interest rate is pegged to the Prime Rate or to Libor. Controlling for the difference in level between benchmarks and for many other explanatory variables, Prime-based borrowers paid 140-150 bp more than Libor-based borrowers. The anomaly persists even when a choice of benchmarks is offered to the same borrower.