SMEs .

(MIF)

433 .. SMEs Excel SMEs .xls .. 11 2550

Types of Loan PricingCost-plus loan pricing . Price Leadership ModelBelow-Prime Market Pricing (The Markup Model) . interbank Risked-based loan pricing

(1)

Adverse Selection

. AAA C AAA C AAA C . AAA C . . C AAA

(1)

(1) . Rising Earning Volatility (2) .(3) Credit Rating . (4)

(2)Risk-Based Pricing (1) Fair Pricing (2) Economic Capital (EC)(3) RAROC (Risk-adjusted Return on Capital)(4) Credit Risk Portfolio Management(5) (6)

(1) . (2) . (2.1) (Administration Costs) (2.2) (Capital Costs)

(2.2) (2.2.1) Expected Loss(2.2.2) Cost of Capital () () (Capital Structure) Allocated Economic (Equity) Capital Funding Costs

Risk-Based Loan Pricing Pricing is Based on Counter-partys Risk Level.

Lending Rate (Given Rating) = Administration Costs + Risk-Based Spread

Administration Costs Loan

1. ()

2. Loan Credit Analysis

Risk-Based Spread

(1) Expected Loss Charges(2) Hurdle Rate Quoted Rate ()(3) Funding Costs

(1) Expected Loss Charges

(1) Exposure at Default (EAD)(2) Recovery Rate (RR)(3) Probability of Default (PD) Credit Rating

Expected Loss Charges = PD x { EAD x (1-RR) } = PD x { EAD x LGD }Note: LGD = Loss Given DefaultRisk-Based Spread

Expected Loss Charges SMEs 1 (1) Exposure at Default (EAD) = 1 (2) Loss Given Default (LFD) = 1.1282%(3) Probability of Default (PD) = 0.1118%

Expected Loss Charges = 0.001118 x { 1 x 0.011282 }= 12.62 Risk-Based Spread

Expected Loss ChargesExpected Loss Charges

(1) Loan Counter-party (2) Credit Portfolio Default Correlation Concentration Risk-Based Spread

(2) Hurdle Rate Quoted RateHurdle Rate Loan Price . .

Quoted Rate Loan Price . Loan EVA . (1) Comparable Market Rate (2) . Niche Market(3) Risk-Based Spread

(3) Funding CostsUses of Fund Loan = Credit Asset Funding Sources of Fund = Debt Long-Termed Bonds + Allocated Economic Equity Capital

Capital Providers Required Rates of Return

Required Rates of Return Capital Providers Costs of Fund .Risk-Based Spread

Funding Costs (K) Kd = Cost of Debt T = Tax RateKe = Cost of EquityDE = Debt-to-Allocated Equity Ratio Loan

Risk-Based Spread

Funding Costs Funding Costs* = {EC x Ke} + {(1-EC) x Deposit Rate}* WACC Deposits Equity Capital 1 WACC Ke . Unlevered Firm . Funding Cost Capital Cost Long-Term Debt

Risk-Based Spread

Economic Capital (EC) ?

Credit Risk Portfolio Model Economic Capital Loan Portfolio. Loan

Economic Capital Allocation1. Loan Capital Risk Contribution2. Capital Loans Economic Capital 3. 4. Capital Economic Capital Regulatory Capital

Economic Capital Allocation1. Bottom-Up Approach VaR Loan . Allocated EC { Loan j } = Regulatory Capital { Loan j } 2. Top-Down Approach. EC Loan Portfolio InternalCredit Risk Portfolio Model Loan

Bottom-Up Approach . Allocated EC { Loan j } = Regulatory Capital { Loan j } . . BIS II

Bottom-Up Approach . SMEs Credit Rating 1 Risk Asset = RiskWeight (Given Rating) x AssetSize = 100% x 1 = 1 Minimum Capital-to-Risk Asset = 8.50% Capital = 8.50% x Risk Asset = 8.50% x 1 = 85,000

Loan 1 EC = 85,000 Debt = 915,000

BIS Standardised Approach FIRB AIRB 1. Granular Loan Loan Credit Portfolio ( SMEs) 2. Asymptotic Portfolio N ( 1,000 ) 3. LGD Default Correlation

1 2 Concentration Risk

Concentration Risk

Bottom Up Approach . . .1. Regulator

2. Capital RC > EC

3. Loan Portfolio BIS Assumptions

4. EC { Loan j } EC { Port } RC = EC

Top-Down Approach. EC Loan Portfolio Credit Risk Portfolio Model Loan

. Internal Model . Internal Credit Risk Portfolio Model

EC { Loan j } EC { Loan j } Loan Portfolio . Loan j (Risk Contribution)

2 1. Incremental Credit VaR2. Marginal Credit VaR Component Credit VaR

Incremental Credit VaR (IVaR)IVaR Credit VaR Credit Portfolio Loan EC

IVaR { Loan j } = VaR Port j - VaR Port j

ECIVaR { Loan j } = IVaR { Loan j } EL { Loan j }

Incremental Credit VaR (IVaR). 1,000 1. VaR Port j = 800.20 2. VaR Port j = 800.00 3. EL { Loan j } = 0.09

IVaR { Loan j } = 800.20 - 800.00 = 0.20 ECIVaR { Loan j } = 0.20 0.09 = 0.11 Loan 1 EC = 0.11 Debt = 0.89

Incremental Credit VaR (IVaR)1. EC Loan EC K 2. Pricing Adverse Selection Problem Risk Contribution 3. () Risk Contribution

Marginal Credit VaR (MVaR)MVaR Credit VaR Loan j

Component Credit VaR (MVaR)*CVaR MVaR { Loan j } Loan J

VaR Positive Homogeneity Coherent Risk Measure * CVaR MVaR Risk Contribution (RC) CVaR VaR { Portfolio } CVaR Component

MVaR CVaR Economic Capital Allocation

Capital Assumptions . Internal Credit Risk Portfolio Model

Internal Model

1. Monte-Carlo Based Risk Contribution (RC)*2. Analytical RC * RC EC { Loan j } Contribution Loan j RC Risk Sensitivity

Distribution Portfolio Loan Loss Smooth Function 1. VaR { Portfolio } Smooth Function Loan j 2. Derivatives

** Gourieroux et al., Sensitivity analysis of value at risk, Journal of Empirical Finance 7, 225-245.

1. Monte-Carlo Based Risk Contribution (RC) Asset Value Model Arvanitis and Gregory, 2001, Credit: The Complete Guide to Pricing, Hedging and Risk Management, RISK Publication, London, pp. 90-98.2. Analytical RC CreditRisk+ Model Tasche, Capital Allocation with CreditRisk+

RC

RC

Funding CostsFunding Costs = {EC x Ke} + {(1-EC) x Deposit Rate} = (0.0896% x 8.24%) + {(1-0.0896%) x 2.27%} = 2.2753% ( 1)

= Expected Loss + Operating Costs + Funding Costs = 0.0013% + 3.66% + 2.2753%} = 5.9369%

= 232.06 7.74 % 8.00% EP

() 341.51 9.90 % 8.00% . EP . 46.51 {=4.83 + 41.68} Required EC 400

289.19 10.0387%. EP 4.83 . Economic Capital

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