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The impact of Basel Accords on the lender’s profitability under different pricing decisions

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  • Bo Huang

    (School of Finance, Renmin University of China, Beijing, P.R. China)

  • Lyn C Thomas

    (Southampton Business School, University of Southampton, Southampton, UK)

Abstract

In response to the deficiencies in financial regulation revealed by the global financial crisis a new capital regulatory standard, Basel III, has been introduced. This builds on the previous regulations known as Basel I and Basel II. We look at how the interest rate charged to maximise a lender’s profitability is affected by these three versions of the Basel Accord under three types of pricing: a fixed-price model, a two-price model and a variable risk-based pricing model. We investigate the result under two different scenarios. First, a fixed price of capital, and second, a fixed amount of equity capital available. We develop an iterative algorithm for solving the latter based on solution approaches to the former. The riskiness of the portfolio has more significance than the Basel Accord requirements but the move from Basel I to Basel II has more impact than that from Basel II to Basel III.

Suggested Citation

  • Bo Huang & Lyn C Thomas, 2015. "The impact of Basel Accords on the lender’s profitability under different pricing decisions," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 66(11), pages 1826-1839, November.
    • Handle: RePEc:pal:jorsoc:v:66:y:2015:i:11:p:1826-1839
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    Cited by:

    1. So Yeon Chun & Miguel A. Lejeune, 2020. "Risk-Based Loan Pricing: Portfolio Optimization Approach with Marginal Risk Contribution," Management Science, INFORMS, vol. 66(8), pages 3735-3753, August.
    2. Liu, Wanan & Fan, Hong & Xia, Meng, 2023. "Tree-based heterogeneous cascade ensemble model for credit scoring," International Journal of Forecasting, Elsevier, vol. 39(4), pages 1593-1614.

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