Credit Risk Pricing And The Cost Of Risk: A Two Way Avenue
This paper seeks to investigate the banking sector’s internal mechanisms that might bring about a negative spiral of credit risk by building a model for the interaction between the increase of the credit risk premiums and that of the provision expenses. Statistical results suggest that while the change in expected losses on credit portfolio is a strong determinant in credit risk pricing, a higher risk premium is one of the major factors of provision expenses in Romania. This confirms that overshooting credit risk premiums could affect banking stability. Nevertheless, the empirical analysis does not reject the rational expectations hypothesis in credit risk pricing.
Volume (Year): 5(558)(supplement) (2011)
Issue (Month): 5(558)(supplement) (July)
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