Quotation De Silva, Hannelore, Dockner, Engelbert, Jankowitsch, Rainer, Pichler, Stefan, Ritzberger, Klaus. 2014. Choice of Rating Technology and Loan Pricing in Imperfect Credit Markets. Journal of Risk 17 (1), 29-62.


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Abstract

Accurate rating systems are of central importance for banks to price and manage their loan portfolios. A bank’s choice to invest in a more accurate rating technology is based on a trade-off: the better rating system usually comes at higher cost, but endows the bank with a competitive advantage, which includes potentially better access to funds. This paper models the rating technology choice of a bank as a two-stage game in an oligopolistic banking sector. In the first stage banks choose between two alternative rating technologies that provide estimates about a borrower’s default probability with varying precision. In the second stage banks set their loan prices based on estimated default probabilities in an imperfectly competitive loan market. While rating technology investment is lumpy and characterized by fixed costs, loan prices vary continuously with their markup over the risk-free rate of interest. The interaction of loan pricing and rating technology investment gives rise to the following predictions: equilibrium adoption of the new rating technology need not increase individual banks’ profits; identical banks in a symmetric banking sector might adopt the more accurate rating technologies sequentially rather than simultaneously; and increased competition in the banking sector slows investment in the new rating technology.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Journal of Risk
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, STRAT-B, WH-B
Language English
Title Choice of Rating Technology and Loan Pricing in Imperfect Credit Markets
Volume 17
Number 1
Year 2014
Page from 29
Page to 62
Reviewed? Y
URL https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2791413
DOI na

Associations

People
De Silva, Hannelore (Details)
Dockner, Engelbert (Details)
Jankowitsch, Rainer (Details)
Pichler, Stefan (Details)
External
Ritzberger, Klaus (Institut für höhere Studien, Austria)
Organization
Research Institute for Computational Methods FI (Details)
Institute for Finance, Banking and Insurance IN (Details)
Research Institute for Capital Markets FI (Details)
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