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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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3. Loan management

The corporate goal of value creation has direct implications for loan pricing and securitization.

  • Break-even loan pricing: equity invested = present value of expected cash flows. We have seen that the margin on loans should incorporate three elements: an ‘equity’ spread to reward shareholders, the probability of default, and the amount that would be recovered in case of default.

  • Securitization: should the bank keep or sell the loans? Incentives for selling loans include freeing of the bank’s equity, access to liquidity, or the diversification of the loan portfolio.

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