This paper decomposes loan rate dispersion in the interbank loan market. Using transaction-level data, we documented dispersion in uncollateralized overnight loan rates even during periods of low interest rates in Japan. Applying the AKM model, we quantified the contributions of borrower and lender heterogeneity to loan rate dispersion. Lender heterogeneity accounted for approximately three times more dispersion than borrower heterogeneity. The contribution of borrower heterogeneity exhibited a downward trend over time. Positive assortative matching along borrowers' and lenders' average loan rates was observed. For term loans, borrower heterogeneity accounted for a larger share of loan rate dispersion than did overnight loans.
Keywords: interbank loans; loan rate dispersion; AKM model; over-the-counter market; bank heterogeneity
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.