This study fits into the research topic about the pricing and risk management models in the decisions of financial intermediaries. In particular, this work investigates the Project Finance (PF) exposures which are characterized by a specific prudential regulation in the general framework of Basel II, so called Supervisory Slotting Criteria Approach (SSCA). After a literature review about the bank loans pricing, this research aims at, on the one hand, investigating the impact of the SSCA on the risk-adjusted pricing applied by a sample of banks operating in the PF sector in Italy and, on the other hand, identifying a subjective model of judgmental analysis that clarifies the specific risk weights to be considered for mapping projects to the five supervisory categories (strong, good, satisfactory, weak, default), highlighting the implications on pricing. The results emerging from empirical analysis confirmed theoretical expectations: on average the pricing increases with the higher risk of PF exposure (i.e. from strong to default in the SSCA). Moreover, varying the risk weights assigned to each evaluation driver of every individual supervisory category also pricing modifies, increasing or reducing according to the factors the bank considers relevant to its risk exposure. Among the strengths of the paper, as well as the empirical analysis about the pricing-PF relation not much investigated so far, the proposal of a judgment-based model to classify PF loans. Without a precise indication by international regulators, the same project could be differently valued based on merely subjective evaluations made by banks, then not confirmed by experience yet. But a criticism of this model comes from inevitable difficulties to subjectively assess standard weights.

Project finance exposures in the supervisory slotting criteria approach: pricing and judgemental analysis

MARCHETTI, Pietro;VENNERI, Anna Valeria
2013-01-01

Abstract

This study fits into the research topic about the pricing and risk management models in the decisions of financial intermediaries. In particular, this work investigates the Project Finance (PF) exposures which are characterized by a specific prudential regulation in the general framework of Basel II, so called Supervisory Slotting Criteria Approach (SSCA). After a literature review about the bank loans pricing, this research aims at, on the one hand, investigating the impact of the SSCA on the risk-adjusted pricing applied by a sample of banks operating in the PF sector in Italy and, on the other hand, identifying a subjective model of judgmental analysis that clarifies the specific risk weights to be considered for mapping projects to the five supervisory categories (strong, good, satisfactory, weak, default), highlighting the implications on pricing. The results emerging from empirical analysis confirmed theoretical expectations: on average the pricing increases with the higher risk of PF exposure (i.e. from strong to default in the SSCA). Moreover, varying the risk weights assigned to each evaluation driver of every individual supervisory category also pricing modifies, increasing or reducing according to the factors the bank considers relevant to its risk exposure. Among the strengths of the paper, as well as the empirical analysis about the pricing-PF relation not much investigated so far, the proposal of a judgment-based model to classify PF loans. Without a precise indication by international regulators, the same project could be differently valued based on merely subjective evaluations made by banks, then not confirmed by experience yet. But a criticism of this model comes from inevitable difficulties to subjectively assess standard weights.
9781137293763
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11587/365978
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