Thresholds for Prime Rate Changes and Tests for Symmetry

The popular assertion -- that banks raise loan rates more readily than they lower them in opposite circumstances -- returns to the forefront during every period of declining market interest rates. Perhaps this assertion captures attention because since the 1980s, the ubiquity of credit card balances means that consumer loan rates affect more people than ever. In this article, the author presents specific tests for asymmetric behavior in bank loan rates. The results suggest that the bank prime lending rate, in particular, is slower to decrease than increase. The findings also suggest that one has to put the asymmetry in perspective. The prime rate does not remain far above where it would be in the absence of asymmetry. In addition, the asymmetry probably is the market's response to the rise in default and late payment probabilities that occurs during cyclical downturns in the economy.