The Study on the Loan Risk Pricing of the Bank in Internal Rating-Based Approach

Abstract

Loan risk pricing system of the bank is the core of interest rate marketization. Realizing independent pricing of loan interest rate will be an inevitable tendency. At present, commercial banks of China have widely developed credit rating system for customers. And it is a question which must be solved urgently that how to carry on risk pricing of loan interest rate and determine market competition strategy based on the system. This paper sets up a loan loss distribution model on the basis of the four assumptive conditions used in Internal Rating-Based approach of the New Basel Capital Accord, and shows that loan risk pricing of banks has "the seesaw effect" according to the same risk-adjusted return on capital of debtors with different credit grades. Namely, banks whose operation cost is low have price advantage on providing loans to debtors with high credit rank and can accordingly take in lower interest rates compared with banks whose operation cost is high. But when providing loans to debtors with low credit rank, they must take in a higher interest rate. The result is very important for commercial banks of China to subdivide the loan market and determine the rational market competitive strategy.