An overview of the risk-neutral valuation of bank loans

Danilo Tilloca and Luciano Tuzzi
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Danilo Tilloca: Unicredit Holding SpA
Luciano Tuzzi: Unicredit Holding SpA

Journal of Financial Perspectives, 2015, vol. 3, issue 2, 145-153

Abstract: This paper provides an overview of a new methodology that allows banks to evaluate loans using the risk-neutral approach. In specifically, it illustrates the methodological framework behind the definition of the risk-neutral default probabilities used to estimate the loans credit spreads. These risk-neutral probabilities are calculated using a contingent-claims approach conceptually similar to the Black–Scholes and Merton framework for modeling corporate liabilities. The proposed risk-neutral approach is suitable for producing estimates, in a fair value computation context, that are as close as possible to the “exit price,” as mandated by IFRS 13, with a lower dependency on internal parameters.

Keywords: Banking; risk; loans (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofipe:0079

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