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Do Lenders Cross-Subsidise Loans by Selling Payment Protection Insurance?

Ashton, J.K. and Hudson, R. (2014) Do Lenders Cross-Subsidise Loans by Selling Payment Protection Insurance? International Journal of the Economics of Business, 21 ((1)). pp. 121-138. DOI: 10.1080/13571516.2013.864118

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Abstract

This study examines the recent UK regulatory decision to ban the joint provision of consumer lending and payment protection or credit insurance (hereafter PPI). This case has wide regulatory implications following concerns that the sale of PPI has been detrimental to customers due to overpriced PPI and a cross-subsidy flowing from PPI to unsecured lending. The study examines whether interest rate setting of unsecured lending is influenced by banks issuing PPI or otherwise to help establish whether such cross-subsidies have been made. This assessment is undertaken over time for a diverse and comprehensive selection of banks offering unsecured lending with and without PPI between 1998 and 2011 for three levels of borrowing. It is reported that offering PPI is a significant explanatory variable of unsecured lending interest rate levels. When unsecured lending is offered with PPI, interest rates are lower, a finding consistent with a cross-subsidy flowing from PPI remiums to unsecured lending.

Item Type: Article
Subjects: Research Publications
Departments: College of Business, Law, Education and Social Sciences > Bangor Business School
Date Deposited: 09 Dec 2014 16:34
Last Modified: 23 Sep 2015 03:00
ISSN: 1357-1516
URI: http://e.bangor.ac.uk/id/eprint/460
Identification Number: DOI: 10.1080/13571516.2013.864118
Publisher: Routledge
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