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Loan pricing under Basel II in an imperfectly competitive banking market

  • Ruthenberg, David
  • Landskroner, Yoram
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    The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4T19413-1/2/63e620320570694a5019ccbdfe62a149
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 12 (December)
    Pages: 2725-2733

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2725-2733
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P. Tsomocos, 2002. "Procyclicality and the New Basel Accord: banks' choice of loan rating system," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    2. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
    3. Sealey, C W, Jr, 1980. " Deposit Rate-Setting, Risk Aversion, and the Theory of Depository Financial Intermediaries," Journal of Finance, American Finance Association, vol. 35(5), pages 1139-54, December.
    4. Berg, Sigbjorn Atle & Kim, Moshe, 1998. "Banks as Multioutput Oligopolies: An Empirical Evaluation of the Retail and Corporate Banking Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 135-53, May.
    5. Claessens, Stijn & Laeven, Luc, 2003. "What drives bank competition? some international evidence," Policy Research Working Paper Series 3113, The World Bank.
    6. Yoram Landskroner & David Ruthenberg & David Zaken, 2005. "Diversification and Performance in Banking: The Israeli Case," Journal of Financial Services Research, Springer, vol. 27(1), pages 27-49, February.
    7. Hasan, Iftekhar & Zazzara, Cristiano, 2006. "Pricing risky bank loans in the new Basel II environment," Research Discussion Papers 3/2006, Bank of Finland.
    8. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
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