1 / 22

*: University of Cagliari (Economics of Financial Intermediaries; Financial Mathematics)

Assessing the effects of collaterals and guarantee on loan pricing under the IRB approach: a comparative-static analysis R. De Lisa*, M. Marchesi**, F. Vallascas*, S. Zedda* 2007 Small business banking and financing: a global perspective Cagliari, 25th May, 2007.

rumer
Télécharger la présentation

*: University of Cagliari (Economics of Financial Intermediaries; Financial Mathematics)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Assessing the effects of collaterals and guarantee on loan pricing under the IRB approach: a comparative-static analysisR. De Lisa*, M. Marchesi**, F. Vallascas*, S. Zedda*2007 Small business banking and financing:a global perspective Cagliari, 25th May, 2007 *: University of Cagliari (Economics of Financial Intermediaries; Financial Mathematics) **: European Commission, Dg Internal Market

  2. Directive on capital adequacy of credit institutions (2006) New regulation on the treatment of capital adequacy: • risk-sensitive capital adequacy; • Fully recognition of “mitigation techniques” (as collaterals and guarantees – C&G) . Lower loan overall credit risk Lower level of own funds

  3. Loan pricing and C&G If the banks’ criteria is based upon the evaluation of credit risk components, C&G topic becomes relevant. Micro perspective: C&G as a sort of “regulatory driver” than can be used in the pricing negotiation process. Macro perspective: C&G could have implications on the overall allocative efficiency of the credit industry. Thus, it is worth to assess the impact of C&G on loan pricing.

  4. The aim of the paper The paper aims at providing a quantitative assessment of the impacts of C&G on a loan pricing A comparative-static analysis applied to a pricing model*. Pricing model is defined by following Loan arbitrage-free pricing models (LAFP). Dermine (1996) *: Under Internal rating based approach.

  5. Methodology: pricing function Expected loss component Organizational component Unexpected loss component

  6. Methodology: Modelling the impact of collaterals LGD C

  7. Methodology: Modelling the impact of guarantees PD C

  8. Methodology: pricing model \ N (x) cumulative distribution function for a standard normal random variable inverse cumulative distribution function for a standard normal random variable G (x) correlation proxy maturity adjustment effective maturity

  9. ( ) ( ) * * * ´ ´ + ´ - PD LGD 1 i C r i cop j j d j e d j = + + Spread * * * * * * - ´ - ´ - ´ 1 PD LGD 1 PD LGD 1 PD LGD j j j j j j ( ) * = - a ´ + a ´ PD 1 PD PD a ³ 0 J D G - é ù E MVC * * = ´ £  LGD MAX 0 ; 45 % 0 LGD 45 % ³ MVC 0 ê ú J E ë û é ù é ù 0 , 5 æ ö R [ ] ( ) ( ) ( ) ( ) ( ) - - ê ú * 0 , 5 1 * * ê ú = ´ - ´ + ´ - ´ ´ - ´ ´ + - ´ ´ ç ÷ C LGD N 1 R G PD G 0 , 999 PD LGD 1 1 , 5 b 1 M 2 , 5 b 1 , 06 j ê ú - ê ú 1 R è ø ë û ë û Methodology: pricing model (1) (2) (3) (4)

  10. Methodology: limits 1) The analysis is based on a “technical” spread 2) C* is the “minimum capital required”

  11. Methodology: comparative-static analysis In particulary, we considered: • The pricing function • Elasticities of credit spread with respect to PD and LGD • Elasticities of capital requirement with respect to LGD and PD • Elasticities of credit spread with respect to MVC and a

  12. 100,00% 90,00% 80,00% 70,00% 60,00% % 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% 0,03% 0,15% 0,45% 0,70% 1,00% 1,40% 2,00% 4,00% 8,00% PD (%) Expected Loss Unexpected Loss Organizational components Main results (01)

  13. e spread, LGD e spread, PD 0.6 0.5 0.4 0.3 0.2 0.1 Pd 0.02 0.04 0.06 0.08 Main results (02) Elasticities of credit spread with respect to PD and LGD

  14. 1 0.9 e C, LGD 0.8 0.7 0.6 0.5 e C, PD 0.4 0.3 PDd 0.02 0.04 0.06 0.08 Main results (03) Elasticities of capital requirement with respect to LGD and PD

  15. alpha , mvc 0.2 0.4 0.6 0.8 1 -0.1 e spread, a -0.2 -0.3 e spread, MVC -0.4 Main results (04) Elasticities of credit spread with respect to MVC and a (given a guarantor’s PD of 0,03% and borrower’s PD of 1,4%)

  16. Main results (04) Elasticities of credit spread with respect to MVC and a (given a guarantor’s PD of 0,15% and borrower’s PD of 1,4%) alpha , mvc 0.2 0.4 0.6 0.8 1 e spread, a -0.1 -0.2 -0.3 e spread, MVC -0.4

  17. Main conclusions 1. Collaterals are the strongest mitigation tool 1.1. more evident when borrower’s PD is high 2. Credit spreads are more elastic to C&G than borrower’s rating improvements 2.1. great appeal in releasing C&G, less in upgrading rating class 2.2. likely impacts on allocative efficiency No neutral regulation

  18. Further research issues: A) Modelling bank and firm behaviour 1. Bank: - economic capital vs. regulatory capital 2. Firm: - cost of alternative choices B) Modelling the impact guarantees under the double default approach

  19. Thanks, Riccardo De Lisa; delisa@unica.it Massimo Marchesi; massimo.marchesi@cec.eu.int Francesco Vallascas; francesco.vallascas@unica.it Stefano Zedda; szedda@unica.it

  20. Methodology: pricing model expected value of the credit at the end of the period interest rate applied on the j risky loan probability of default of the j debtor loss given default on j debtor

  21. Methodology: pricing model Posing E(M) = U(M) we have:

  22. Methodology: pricing model U (M) overall cash flows out Cj equity funding (%) interest rate paid on interbank funding gross return to shareholders operative costs related to the loan

More Related