TABLE OF CONTENTS Methods used to include risk in loan pricing range from simple risk spreads and allocations of loan loss reserves to complex assessment of capital allocation, estimates of default frequency, loss given default, and loss volatility. Developments in quantitative credit and portfolio risk measurement vastly improve a bank s ability to measure and price risk, help facilitate capital management, and determine allowance for loan losses.
Assumptions include spreads, facility fees, fees in lieu of balances, fixed and variable service costs, and other variables. Forecast variables consist of Return on Assets (ROA), Return on Equity (ROE), and Risk-Adjusted Return on Capital (RAROC). Pricing models should be substantially trouble-free to install, use, and administer. They should be available on a wide variety of platforms, determine risk-adjusted returns and yields-to-maturity, and provide multi-period analysis. Finally, pricing models support the negotiating process, offer full relationship profitability, and provide comprehensive context-sensitive help.
This model is available in Modeling Toolkit under Valuation l Stochastic Loan Pricing Model. Second City Bank prices an unsecured $1,000,000 line of credit to Picnic Furniture Manufacturing Co. Details of the transaction follow:
STOCHASTIC PRICING MODEL
DEVELOPED BY PROF. MORTON GLANTZ DR. JOHNATHAN MUN
| Facility Information Borrower Picnic Furniture Manufacturing Co Lenders: Second City Bank Amount: $1,000,000 Five Year Unsecured Facility Purpose: Expansion Bank ROA Guideline: 1.15% | ||
| Facility Information | ||
| Enter Unsecured Line of Credit (Assumed To Be Fully Utilized) | 1,000,000 | |
| Enter 12 Month Average Balances (Assume |
