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					Loan Pricing
Reasonable pricing of bank loans to long puzzled questions. Pricing too high will
drive customers to engage in high risk of economic activities to meet the debt burden
is too heavy, or inhibit the customer's borrowing needs, so turned to other
banks or directly through the open market financing; priced too low, banks can not
achieve profit targets and even banks can not compensate for the cost and risk. Along
with financial deregulation in many countries, the loan market is becoming more
competitive, scientific pricing of loans is more important than ever.
General loan prices, including interest rates, loan commitment fees and service
charges, prepayment penalties or late, the lending rate is a major component of loan
pricing. In the macro-economy, the impact of the general level of interest rates is the
main factor in the credit market, money supply and demand. From the micro-level
study in the loan business practice, bank loans, as supply-side factors to be considered
are many. First, banks provide credit products, capital costs and operating costs. As
mentioned earlier, the average historical cost of capital cost and marginal cost of two
different caliber, which is more appropriate pricing basis for a loan. The operating
cost is the bank for loans before the investigation, analysis, evaluation and monitoring
of loans by tracking spending after the direct or indirect costs. Second, the credit risk
concentration. Credit risk is an objective, albeit to varying degrees, the banks need to
predict credit risk based on their commitment to obtain compensation for default risk.
Third, the loan period. Different duration of the applicable interest rate of loans of
different grades. The longer the loan period, the worse mobility, and interest rates, the
borrowers financial situation more uncertain factors such as loan prices should reflect
the period of relatively high risk premium. Fourth, the bank's target level of
profitability. In the security and guaranteed loans under the premise of market
competitiveness, the bank will seek to make loans at or above the target rate of return
yield. Fifth, financial markets, competitive situation. Bank loans should be compared
with the industry price level, as the Bank loan pricing information. Sixth, the overall
relationship between banks and customers. Bank loans are usually the strong point to
maintain customer relations, so bank loan pricing should also take full account of
customer and business relationship between banks. Finally, banks sometimes require
the borrower to maintain a deposit balance, that is, compensation for the balance of
deposits as lending additional conditions. Compensation for the balance of deposit is
actually a hidden loan prices, Guer and lending rates is the shift in relations between.
Bank of various factors considered, based on developed a number of loan pricing
methods, each method reflects different pricing strategy.
Cost into the pricing
This pricing method is simple, assuming that interest rates include four components:
the cost of loanable funds, funds of non-operating costs, compensation for default risk
(default costs), expected profit, that is certainly in the borrowing costs above the
spreads to determine lending rates, also known as the cost of adding the pricing.
Interest rate is calculated as:
Interest rate = the marginal interest cost of financing the operating costs of + + default
risk is expected to compensate the marginal cost + target profit level of bank
Bank loans funds to secure the interest cost and operating cost levels is not easy, this
requires a well-designed management information system. First, banks should Guiji
all the marginal cost of debt capital data to calculate all new debt funding of the
weighted average marginal cost, as the basis for loan pricing. Then, the operating
costs of bank loans need to develop a systematic method of measurement and
decomposition, the different positions of payroll and benefits staff, recurrent
expenditure, equipment costs and other expenses assessed to each loan business. In
calculating the cost of default, the bank loans can be divided into different risk levels,
based on historical data and then calculate the average loan default rate risk level, thus
determining the risk of loan default rate of compensation. Target profit for the
shareholders of the bank to provide the required return on capital and margin loans is
expected to be achieved.
Cost-plus pricing to consider the loan financing costs, operating costs and customer
costs of default, has a certain rationality. However, this pricing method has its
shortcomings. It requires banks to accurately identify all costs associated with lending
operations, in practice there is quite difficult. Moreover, it does not take into account
the level of market interest rates and competitive factors, in fact, in the fierce
competition, banks are not totally price-makers, often as a price taker.
Benchmark interest rate pricing
Benchmark interest rate pricing is the selection of suitable benchmark interest rate,
bank on top of this plus a spread or multiplied by a factor of loans plus pricing
method. Benchmark interest rate may be treasury interest rates, large negotiable
certificates of deposit interest rates, interbank interest rates, commercial paper interest
rates and other money market rates, lending rates can also be that the banks issued
short-term working capital loans to high-quality customers the lowest interest rate. As
these financial instruments or borrowing a common feature of contract default risk is
low, so their rates are often referred to as risk-free interest rate (Riskless Interest Rate),
is commonly used in the pricing of financial market frame of reference, it is also
known as the benchmark (Benchmark) interest rates. For selected customers, banks
often allow customers to select the appropriate term benchmark interest rates as the
basis for pricing, additional loan risk premium level due to the risk level of customers
vary.
According to the benchmark rate the basic principles of pricing, bank loans to certain
customers is generally the interest rate formula:
Interest rate = base rate + borrowers default risk premium + risk premium of
long-term loan period
After the two parts of the formula is based on the benchmark interest rate increases.
Set default risk premium can use a variety of risk adjustment methods, usually based
on risk level to determine the loan risk premium. However, for high-risk customers,
banks are not subject to a higher risk premium to take the simple approach, because it
will only increase the risk of loan defaults. So, faced with higher risk customers,
banks are mostly thought to comply with credit rationing, on the application be
rejected for such loans in order to avoid risks. If the loan is long term, banks need plus
the risk premium term.
70 years ago in the 20th century, Western banks benchmark interest rate pricing in the
use of common to large banks when the prime rate as a benchmark for pricing loans.
Into the 70's, due to the growing internationalization of the banking sector,
the prime rate as the benchmark lending rate of the leading commercial position of the
challenges of the London interbank offered rate, many banks began to use LIBOR as
the benchmark interest rate. LIBOR for national banks to provide a common price
standard, and customers of each bank's lending rate to provide a
benchmark comparison. After 80 years of the 20th century, there has been less than
the benchmark lending interest rate pricing model. Since the rapid rise of short-term
commercial paper market, coupled with a foreign bank lending rates close to the cost
of financing, forcing many banks offer interest rates below the discount rate (usually
very low money market rates plus a small spread) on the big clients loans. However,
loans to small and medium customers continue to be the prime rate or other
benchmark rates (such as LIBOR) as the pricing basis.
Customer profitability analysis
Customer profitability analysis (Customer Profitability Analysis, called CPA) is a
more complex loan pricing system, its main idea is that the loan pricing, customer
relationship is actually an integral part of the overall pricing of the bank in the pricing
of each loan, it should Considering banks overall business relationship with customers
in the cost of and access to benefits. Customer profitability analysis is to assess the
basic framework for bank customers from a particular bank account was whether the
overall benefits to achieve the profit target banks, the account also known as profit
analysis. Bank account to the bank to bring the customers of all income and all costs,
and compare the bank's target profit, and then measure how the price.
Formula is as follows:
Account the total income is greater than (less than, equal to) account the total cost +
target profit
If the account is greater than the total income of the total cost of the target account
and the profits, which means revenue generated by the account can exceed the
minimum requirement on profit targets. If the formula right and left are equal, then
the bank account just to achieve the established profit targets. If the account is less
than the total income of the total cost of the target account and the profits, there are
two possible scenarios: First, account for less than cost of revenues, loss of the
account; one account revenue is higher than the cost, but profits were lower than the
bank profit targets. In both cases, the banks have the necessary re-pricing of loans to
achieve the profit target set. The following describes each of the formula for each
element of the structure and calculation method.
1. Account the total cost
Account the total cost including the cost of capital, all service charges and
management fees and loan default costs. Cost of capital that banks provide the loans
needed to finance the marginal cost of debt capital used here is the weighted marginal
cost. Services and administrative expenses include the cost of customer deposits,
account management, customer access to funds, issuing checks for service fees, loan
management fees (such as the cost of credit analysis, loan recovery costs and
maintenance costs of a pledge, etc.) and other service items costs. The cost of bank
loans based on default risk measure similar to the average estimate of potential default
loss.
2. Account income
The total income includes bank accounts from the customer's account may
be invested in deposits received investment income, table service inside and outside
the business of the customer fee income and loan interest income and other income.
Among them, the customer account may be invested in deposits means that the client
in the calculation of the average of less than the collection of cash deposits deducted,
after the statutory deposit reserve residual value. Banks may invest deposits obtained
after the combination of certain deposit yields, can be calculated to bring the customer
deposits to the bank's investment income. Service fee income is mainly
loan commitment fees, settlement fees, etc..
3. Target profit
Target profit is the bank capital requirements in each loan obtained from the lowest
income. Target shareholders profit goals established at the bank rate of return (capital
of the target rate of return), loan allocation of capital ratio (capital to asset ratio) and
loan amounts are determined, the formula is:
Target profit = capital / total assets * target rate of return of capital loan amount *
If banks use account for the new customer profitability analysis method of loan
pricing, customers would need Yuce De account Huo Dong, On this basis, the total
costs and Gusuan Shouru account, bank could use the method of old clients have
Fafang loans De price Shuipingjinhang evaluation. In general, if the account is equal
to net profit target, indicating the basic and reasonable loan pricing; If the customer
account is greater than or less than the target net profit, the bank should consider
adjusting the price to customers for the floating or float downward adjustment. Banks
can also be used to raise or lower the price of services to adjust the way to play a role
in loan pricing.
Cost - benefit pricing
One kind of the loan plus the total of all costs and expected benefits and management
cost comparison of loan pricing method. It is composed of three simple steps
1. Estimate all of the income generated by loans to
2. Estimated amount of money actually used the borrower (net of borrower
commitment to keep in bank deposits, plus reserve requirements
3. Income divided by the borrower with loans from the actual amount of money used
to calculate the loan pre-tax earnings.
Lending rate multiplication
In the prime rate (the number of major banks as its weighted cost of capital
determined) based on the borrower according to the different risk levels (limit risk
and default risk) for different interest rates. Under this approach, pricing interest rate
of prime rate plus a certain number or multiplied by a number.
Compensating balance is the bank require the borrower to remain in the bank loan by
the lending limit or the actual amount of a certain percentage (usually 10% to 20%)
calculated the minimum deposit balance.
Compensating balances will help banks reduce credit risk, the compensation may be
subject to the risk of its; of the Borrower, the compensating balances are real interest
rates increase borrowing, increase the interest burden of enterprises.

				
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