Loan pricing under Basel II in an imperfectly competitive banking market

David Ruthenberg*, Yoram Landskroner

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

46 Scopus citations

Abstract

The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.

Original languageEnglish
Pages (from-to)2725-2733
Number of pages9
JournalJournal of Banking and Finance
Volume32
Issue number12
DOIs
StatePublished - Dec 2008

Keywords

  • Basel II
  • Corporate customers
  • Exposure at default (EAD)
  • Internal rating based (IRB) approach
  • Loss given default (LGD)
  • Minimum capital requirements
  • Probabilities of default (PD)
  • Retail customers
  • Standardized approach
  • Unexpected loss (UL)
  • Value-at-Risk (VaR)

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