|M.Sc Student||Kaplan David|
|Subject||Credit Pricing and Credit risk Management in Commercial|
|Department||Department of Industrial Engineering and Management||Supervisor||Professor Kim Moshe|
In this thesis I examine empirically the credit-price components, specifically what risks are priced and what is the influence of the size of the borrowing firm, the quality of the bank and the prices of the rival banks on the credit price of the representative bank, by analyzing the spread between the sectorial credit interest rate and the prime interest rate using a panel of data covering Israel’s banking system between 1996-2001. I find that the interest rate set for each sector, embodies not only the risk from the stand alone sector (idiosyncratic default risk) but also the risk from all other sectors (portfolio risk). In addition, I find that the quality (the bank specific capital to assets ratio relative to the average of the banking sector) of the lending bank is very important to the sectors that are considered very risky. Getting a loan from a higher quality bank may represent a positive signal for which those sectors are willing to pay higher rate. Further, a negative association was found between the sectorial (average) firm size and the price of credit. For all banks in the system, but not for the five big banks, rivals' interest rates are negatively and significantly associated with the interest rate of the representative bank. This result may point to lack of competition among the big banks.