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Pricing farm loans for credit risk

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  • Bramma, Keith M.

Abstract

This article analyses the risk-return efficiency of limits to which loan pricing accounts for credit risk in the Australian-farm sector. A key issue faced by banks is the trade-off between raising returns through higher risk premiums and the possibility of impairing credit quality. The simulation results suggest that the stochastic efficiency of the size of risk-pricing limits is positively related to volatility of farm income when dynamic relationships are considered. This finding implies that Australian banks should price further across the credit-risk spectrum to farm businesses with relatively volatile incomes compared to those with stable incomes.

Suggested Citation

  • Bramma, Keith M., 2000. "Pricing farm loans for credit risk," 2000 Conference (44th), January 23-25, 2000, Sydney, Australia 123607, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare00:123607
    DOI: 10.22004/ag.econ.123607
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    References listed on IDEAS

    as
    1. Bramma, Keith M. & Batterham, Robert L., 1994. "Linking Farm Risk to Institutional Credit Risk," 1994 Conference (38th), February 8-10, 1994, Wellington, New Zealand 148074, Australian Agricultural and Resource Economics Society.
    2. Anderson, Jock R. & Dillon, John L. & Hardaker, Brian, 1977. "Agricultural Decision Analysis," Monographs: Applied Economics, AgEcon Search, number 288652, November.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    4. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    5. Lawrence, Edward C & Arshadi, Nasser, 1995. "A Multinomial Logit Analysis of Problem Loan Resolution Choices in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 202-216, February.
    6. Barry, Peter J. & Ellinger, Paul N., 1989. "Credit Scoring, Loan Pricing, And Farm Business Performance," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-11, July.
    7. Pederson, Glenn & Boehlje, Michael & Doye, Damona G. & Jolly, Robert W., 1987. "Resolving Financial Stress in Agriculture by Altering Loan Terms: Impacts on Farmers and Lenders," Staff General Research Papers Archive 11374, Iowa State University, Department of Economics.
    8. Stephen C. Gabriel & C. B. Baker, 1980. "Concepts of Business and Financial Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 560-564.
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    Keywords

    Agricultural Finance; Risk and Uncertainty;

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