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Pricing risky bank loans in the new Basel II environment

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Author Info

  • Hasan, Iftekhar

    ()
    (Rensselaer Polytechnic Institute and Bank of Finland)

  • Zazzara, Cristiano

    ()
    (CAPITALIA Banking Group, University “Luiss-Guido Carli”, École Polytechnique Fédérale de Lausanne)

Abstract

Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk. In this paper, we propose a simplified formula to price bank’s corporate loans, aiming at making bank managers aware of the creation/destruction of shareholder value. We show that the mathematical treatability of the proposed formula and its easy feeding with internal and market inputs allow simple implementation by the final user.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0603netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 3/2006.

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Length: 49 pages
Date of creation: 18 Apr 2006
Date of revision:
Publication status: Published in Journal of Banking Regulation, 2006, pages 243-267.
Handle: RePEc:hhs:bofrdp:2006_003

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: Basel II; rating; pricing; exposure at default; EVA;

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References

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  1. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
  2. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
  3. Andrea Sironi, 2000. "An analysis of European banks SND issues and its implications for the design of a mandatory subordinated debt policy," Finance and Economics Discussion Series 2000-41, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Kilponen, Juha & Ripatti , Antti, 2006. "Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy," Research Discussion Papers 5/2006, Bank of Finland.
  2. Ruthenberg, David & Landskroner, Yoram, 2008. "Loan pricing under Basel II in an imperfectly competitive banking market," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2725-2733, December.
  3. Evžen Kocenda & Martin Vojtek, 2009. "Default Predictors and Credit Scoring Models for Retail Banking," CESifo Working Paper Series 2862, CESifo Group Munich.

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