Pricing Of Commercial Banks' Corporate Loans Based On Internal Ratings

Basel Capital Accord, especially the introduction of Basel Ⅲ, has raised higher requirements on the quantity and quality of the capital of commercial banks. Commercial banks increasingly emphasize on optimizing the allocation of economic capital and saving economic capital consumption. Accurate pricing of credit assets in the premise of risk control, and improving the level of return of assets is the inevitable choice of the commercial banks. The launch of the process of China’s market-oriented interest rate makes the narrowing of interest rate differentials between deposits and loans is also inevitable. In this context, accurate pricing of the loan has important implications for the competitiveness of the domestic commercial banks, and the balance of benefits and risks of the banks. Internal rating’s importance, as one of the core technology of the Basel Capital Accord, is self-evident. Application of internal rating results in the commercial bank loan pricing is necessary and possible.In this paper, I will analyze the two basic components of internal rating--customer ratings and debt ratings, including the models and rating content of them, and get main results of customer ratings and debt ratings:the probability of default (PD) and loss given default (LGD). On the basis of obtaining PD and LGD, I will analyze the expected loss (EL), unexpected loss (UL) and the cost of economic capital (EC) of a single loan, and make risk-adjusted return on capital (RAROC) as a intermediary, so as to use the internal rating results in loan pricing of the commercial banks.The paper also analyzes the impacts of internal cost of capital, operating costs, taxes and bank-enterprise relationship on loan pricing, so that the paper can make a complete analysis of loan pricing.The purpose of this paper is to make the loan pricing of commercial banks more scientific and systematic, improve the ability of the price of loan to cover the loan risk, and change loan pricing model, now used in banks, which is extensive and based on experience.