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Pricing risky bank loans in the new Basel II environment

Author

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  • Hasan, Iftekhar
  • Zazzara, Cristiano

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.

Suggested Citation

  • Hasan, Iftekhar & Zazzara, Cristiano, 2006. "Pricing risky bank loans in the new Basel II environment," Bank of Finland Research Discussion Papers 3/2006, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2006_003
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    File URL: https://www.econstor.eu/bitstream/10419/212028/1/bof-rdp2006-003.pdf
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    References listed on IDEAS

    as
    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.
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    More about this item

    Keywords

    Basel II; rating; pricing; exposure at default; EVA;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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