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Risk Adjusted Pricing Strategies for the Corporate Loans Business – Do They Really Create Value ?

For a fairly long time, the German corporate loan business has been regarded in publications on the subject as a value destroyer. On the basis of the bank lending statistics of the Deutsche Bundesbank, our analysis clearly shows a cyclical as well as a structural problem preventing the big four German banks from creating value. In order to analyze possible strategies to solve this issue within a systemic approach, we built a model which included almost 200 variables. Running this model until the year 2010 the outcome is appalling: the break-even return on equity will not be reached. We therefore modelled in a second step the widely discussed strategy of risk adjusted pricing. The outcome raises hope – although this strategy in itself is not sufficient to solve the problem entirely, the return on equity can be increased.