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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
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    3. Anderson, Jock R. & Dillon, John L. & Hardaker, Brian, 1977. "Agricultural Decision Analysis," Monographs: Applied Economics, AgEcon Search, number 288652, November.
    4. 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(01), pages 1-11, July.
    5. 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.
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    Keywords

    Agricultural Finance; Risk and Uncertainty;

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