This paper detects how the Basel II IRB approach affects the bank loan pricing mechanism. We develop a multi period risk adjusted pricing methodology under the prevalent loan repayment schemes based on the theoretical framework provided by Hasan and Zazzara (2006). In addition to the previous literature, we shed more light 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 modeling theory suggests; on the implications stemming from the adoption of the IRB advanced approach, showing that lower risk adjusted spreads are assured when the effect of longer maturities (higher spreads) is off balanced by a reduction of LGD.

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

CURCIO, DOMENICO;
2011

Abstract

This paper detects how the Basel II IRB approach affects the bank loan pricing mechanism. We develop a multi period risk adjusted pricing methodology under the prevalent loan repayment schemes based on the theoretical framework provided by Hasan and Zazzara (2006). In addition to the previous literature, we shed more light 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 modeling theory suggests; on the implications stemming from the adoption of the IRB advanced approach, showing that lower risk adjusted spreads are assured when the effect of longer maturities (higher spreads) is off balanced by a reduction of LGD.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11588/394662
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