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Are lenders using risk-based pricing in the consumer loan market? The effects of the 2008 crisis

Silvia Magri ()

No 1164, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper analyzes whether in Italy the price of consumer loans is based on borrower specific risk. Mispricing could threat financial stability through negative effects on lenders' profitability; risk-based pricing also leads to a more efficient allocation of credit through lower prices for low-risk borrowers, with positive effects on economic growth and financial stability. The evidence available from data collected since 2006 through the Survey on Household Income and Wealth shows that consumer loan pricing has been more risk-based after the 2008 financial crisis. Households’ economic and financial conditions (net wealth, number of income earners and education of the household head) became significant and economically important in influencing the interest rates in 2010-12. These are also the most important drivers of the probability of delinquency on consumer loans; lenders also focus on these variables in selecting borrowers. As a consequence of the 2008 crisis, lenders have therefore paid more attention to borrowers' credit risk not only during the selection process, but also in deciding the price of the loan.

Keywords: interest rates; consumer loans; risk-based pricing (search for similar items in EconPapers)
JEL-codes: D40 D82 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2018-01
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