A Raroc Valuation Scheme for Loans and Its Application in Loan Origination

Risks

Ha Pham¹  Bernd Engelmann¹ 

[1] Faculty of Finance-Banking, Ho Chi Minh City Open University, 35-37 Ho Hao Hon, Dist 1, Ho Chi Minh City 700000, Vietnam;

关键词: loan pricing;    RAROC;    loan origination;   

DOI  :  10.3390/risks8020063

来源: DOAJ

【 摘 要 】

In this article, a risk-adjusted return on capital (RAROC) valuation scheme for loans is derived. The critical assumption throughout the article is that no market information on a borrower’s credit quality like bond or CDS (Credit Default Swap) spreads is available. Therefore, market-based approaches are not applicable, and an alternative combining market and statistical information is needed. The valuation scheme aims to derive the individual cost components of a loan which facilitates the allocation to a bank’s operational units. After its introduction, a theoretical analysis of the scheme linking the level of interest rates and borrower default probabilities shows that a bank should only originate a loan, when the interest rate a borrower is willing to accept is inside the profitability range for this client. This range depends on a bank’s internal profitability target and is always a finite interval only or could even be empty if a borrower’s credit quality is too low. Aside from analyzing the theoretical properties of the scheme, we show how it can be directly applied in the daily loan origination process of a bank.

【 授权许可】

Unknown