A risk-adjusted pricing model for bank loans: Challenging issues from Basel II

Domenico Curcio and Igor Gianfrancesco

Journal of Risk Management in Financial Institutions, 2011, vol. 4, issue 2, 117-145

Abstract: This paper detects how the Basel II internal ratings based (IRB) approach affects the bank loan pricing mechanism. A multi-period risk-adjusted pricing methodology under the prevalent loan repayment schemes based on the theoretical framework provided by Hasan and Zazzara (2006) is developed. In addition to the previous literature, more light is shed on the contribution of the two types of losses (expected and unexpected) to the total risk-adjusted spread, finding evidence which is consistent with what credit risk modelling theory suggests. On the implications stemming from the adoption of the IRB advanced approach, it is shown that lower risk-adjusted spreads are assured when the effect of longer maturities (higher spreads) is off-balanced by a reduction in loss given default (LGD).

Keywords: asset pricing; banks; Basel II; risk management; regulation; G12; G21; G28; G32 (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/1394/download/ (application/pdf)
https://hstalks.com/article/1394/ (text/html)
Requires a paid subscription for full access.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2011:v:4:i:2:p:117-145

Access Statistics for this article

More articles in Journal of Risk Management in Financial Institutions from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().