Credit risk pricing through South African economic cycles.
Brink, Duan De Bruin.
ABSTRACT Banks have been struggling since the 2008 global financial collapse to generate consistent and reasonable shareholder returns in the wake of a sluggish economic landscape. This research investigated whether banks are successful in adapting to changes in the economy, by comparing the realised returns generated before and after the financial collapse, at an individual loan account level. Banks that have superior credit risk pricing models, driven by a pro-active credit risk department, will survive the onslaught of future economic downturns and come out stronger and more competitive. Individual loan data was collected from a credit provider to establish whether credit departments are pro-active in assessing credit risk and pricing for it accurately, in the context of a changing economic environment. Based on the results, banks are not successful in pricing through economic cycles. Banks need to continuously measure and back-test the realised returns of loans and loan portfolios using simple techniques like internal rates of return, driven by real cash flows instead of relying mainly on the financial results produced by accounting standards, which can be biased and judgemental.
Credit -- Management,Bonds -- Prices,Risk management.