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).
A risk-adjusted pricing model for bank loans: challenging issues from Basel II
GIANFRANCESCO I
2011-01-01
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).I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
