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György Walter

received his MSc in finance and later his Ph.D. in corporate finance from the Corvinus University of Budapest. Following his doctoral studies he spent 10 years in the banking sector in the management of several commercial banks in Hungary. He is currently an associate professor at the Corvinus University of Budapest, Faculty of Business Administration, at the Department of Finance. He is also the director of Corvinus MBA Center. He accomplished his habilitation in 2017. His main research fields are banking, corporate finance, financing decisions, and income contingency.

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György Walter: Are project loan prices properly risk adjusted?

Basel regulation inspired commercial banks to apply appropriate risk adjusted price calculations for their exposures to create value for shareholders. Using the theoretical methodology elaborated in the literature practical applications usually calculate RAROC of corporate loans compared to the expected ROE. However project loans are special part of corporate loans, risk parameters are hard to measure, estimations of default probabilities rely on specific and complex cash flow simulations. We set the research questions whether project finance loans were properly priced based on their risk in the past, and what conclusions can be learnt under current market circumstances. First we define a model for appropriate risk adjusted pricing. Based on the model and its empirical input parameters, assuming different margins and leverages, we estimate the implied (anticipated) maximum probability of default (PD) of projects, where project loans could produce a value added to lenders. We compare these maximum PDs with reference points available from researches. We conclude that by the years of 2006-2007 several projects were very unlikely to produce any value added for shareholders and did not event reached the minimum margin. We also show that current market and regulatory circumstances significantly increased minimum margins and must shift lenders to a more conservative pricing and leverage policy.

Last modified: 2018.11.30.