Pricing Risky Bank Loans in the New Basel II Environment

49 Pages Posted: 31 Aug 2007

See all articles by Cristiano Zazzara

Cristiano Zazzara

Libera Università degli Studi Sociali (LUISS) Guido Carli - Fondo Interbancario di Tutela dei Depositi and Instituto di Studi Economici

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Date Written: 2006

Abstract

Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk. In this paper, we propose a simplified formula to price bank's corporate loans, aiming at making bank managers aware of the creation/destruction of shareholder value. We show that the mathematical treatability of the proposed formula and its easy feeding with internal and market inputs allow simple implementation by the final user.

Keywords: Basel II, rating, pricing, exposure at default, EVA

JEL Classification: C63, G12, G21, G28

Suggested Citation

Zazzara, Cristiano and Hasan, Iftekhar, Pricing Risky Bank Loans in the New Basel II Environment (2006). Bank of Finland Research Discussion Paper No. 3/2006, Available at SSRN: https://ssrn.com/abstract=1010588 or http://dx.doi.org/10.2139/ssrn.1010588

Cristiano Zazzara

Libera Università degli Studi Sociali (LUISS) Guido Carli - Fondo Interbancario di Tutela dei Depositi and Instituto di Studi Economici ( email )

00162 Rome, Roma
Italy
+39 06 699 86 402 (Phone)

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

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