SELF-SELECTION AND THE PRICING OF BANK SERVICES: AN ANALYSIS OF THE MARKET FOR LOAN COMMITMENTS AND THE ROLE OF COMPENSATING BALANCE REQUIREMENTS.

The article reports on the pricing of bank services through analysis of the market for loan commitments as well as the pricing of other bank services. Also, the role of compensating balance requirements associated with loan commitments is looked at. The bank, when providing a loan commitment, specifies an amount that it will lend up to and gives a fixed rate or an interest rate which is tied to the prime rate with a predetermined formula. They then charge a price or premium which is a reflection of the estimated expected cost of providing that loan commitment which relates to the customer's credit quality and the timing of the borrowing.