How Maltese banks calculate risk in their loan pricing policies

Abstract

The aim of this study is to analyse how Maltese banks calculate risk in their loan pricing policies. The liberalisation of interest rates offers Maltese banks the opportunity to adopt a loan pricing policy which reflects the desired risk return trade-off established by the board. In the strive to achieve the desired risk return trade-off, the bank has to measure the risk of lending activity. The first part of the dissertation describes how credit analysis has evolved and identifies new models and procedures which are currently being developed. The second part of the study describes how Maltese banks calculate risk before assigning a price to a loan. The local banks' loan pricing policies and procedures are analysed and studied in detail. Then, these are compared with the guiding hypotheses and the related literature which were earlier developed. The dissertation provides an overview of the findings and investigates the possibilities of using new procedures and pricing techniques. The analysis proposes recommendations. Additionally, it suggests other approaches of exploring the research area that can be conducted by students from the banking and accountancy disciplines.