The sensitivity of the prime rate to money market conditions

Commercial banking's institutional setting can make one bank's profits dependent upon the pricing strategies of its rivals. In this environment, widely disseminated prime rate quotes, loan contracts with ‘most‐favored‐customer’ clauses, and rule‐of‐thumb pricing techniques can result in prime rate outcomes that jointly maximize banks' market values. In this paper the relationship between the prime and money market rates is examined over the last decade to determine if the prime rate behaves more like a competitive money market rate than an oligopolistic price.