Pricing Small Loans – Essential Concepts in Loan Pricing

The most significant complaint we hear from bankers regarding in-house and third party pricing models is that they don’t work well on small loans. Bankers get frustrated because no matter what rate assumption they put into their model, the loan never meets the bank’s ROE target levels. In this article, we’ll explain how loan profitability is calculated within a pricing model and how a properly calibrated system allows lenders to be competitive regardless of loan size.

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Funds Transfer Pricing – Essential Concepts in Loan Pricing

The single largest impact on profitability calculations in your loan pricing model is the Funds Transfer Pricing (FTP) rate. Many community bank commercial lenders and credit analysts generally are unfamiliar with the importance of FTP concepts and methodologies and how it figures in to the lending process. Members of the finance team are often tasked with maintaining in-house FTP systems for their institutions, sometimes at the exclusion of lenders and credit personnel.

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New Basel III Standards Lead to Higher Rates or Lower ROE’s

Whether you are a Community Bank mirroring the new Basel III standards voluntarily, or a larger bank required to comply with the new capital guidelines, the effects of these increased standards will cause you to either charge your commercial loan customers (perhaps significantly) higher rates, or accept a significantly lower risk adjusted return on capital (RAROC) for your bank. Prepare now by planning your institution’s most effective response to the implementation of these new guidelines.

Please see the full length article, provided by Austin Associates and LoanPricingPRO™, which covers each of the commonly originated loan types affected by the new standards.

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Capital Considerations Based on Basel III Risk Weightings

The U.S. Basel III final rules on standardized risk weightings went into effect in January of 2015. While the rules won’t be enforced on the community banking sector, most institutions want to stay compliant with the Basel III capital requirements. LoanPricingPRO is designed to accurately calculate the correct equity allocations required under Basel III. You should consider, at a minimum, the following configuration in your loan pricing model setup.

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Community Bankers’ Outlook for 2015

Community bankers are widely divided over their prospects for profit improvement during 2015. The uncertainty of movements in interest rates, rising overhead and continued regulatory pressure have not abated; compared with 2014, 2015 appears to be more of the same.

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