Abstract

This paper examines the factors that cause the variations of the prime rates among individual banks by establishing a prime rate pricing model. The sample includes 38 domestic banks and monthly data are collected from July 1995 to Dec. 1998 to analyze the significant determinants of the prime rate by using a multiple linear regression model. The empirical results show that the banks with larger scale tend to have lower prime rates and that bank capital costs and operating expenses have positive effects on the prime rate pricing. For different types of banks, regional banks have the highest prime rates and new commercial banks have the lowest ones. With respect to different lending strategies, banks that focus on consumer loans have higher prime rates than those offering more commercial loans to reflect their different risk premia. Finally, banks receiving government deposits offer more favorable prime rates due to their lower costs.