Pricing risky bank loans in the new Basel II environment

Abstract

Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk.In this paper, we propose a simplified formula to price bank's corporate loans, aiming at making bank managers aware of the creation/destruction of shareholder value.We show that the mathematical treatability of the proposed formula and its easy feeding with internal and market inputs allow simple implementation by the final user. Key words: Basel II, rating, pricing, exposure at default, EVA JEL classification numbers: C63, G12, G21, G28