Loan Portfolio Swaps and Optimal Lending

Loan Portfolio Swaps and Optimal Lending Theories on loan portfolio swap hedging are based on a portfolio-choice approach. This paper presents an alternative: a firm-theoretic model for bank behavior with loan portfolio swaps. Our paper derives the optimal loan rate and rate-taking loan amount of the bank’s portfolio, and relates them to the market loan rate, counterparty loan rate, swap default risk, capital-to-deposits ratio, and deposit insurance. We find that in the bilateral default risk approach, the comparative static results are generated by four factors: the bank’s risk magnitude about the equity market value, loan composition in the swap contract, the substitution effect in the loan portfolio, and the income effect from the swap transaction. The results imply that changes in the payoff asymmetry in the event of swap default and the bank’s regulatory parameters have a direct effect on the bank’s loan portfolio for lending and swap transactions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Loan Portfolio Swaps and Optimal Lending

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-6336-z
Publisher site
See Article on Publisher Site

References

  • The Default Risk of Swaps
    Cooper, I. A.; Mello, A. S.

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