An Unexpected Crisis? Looking at Pricing Effectiveness of Different Banks

33 Pages Posted: 9 Aug 2011

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2011


This paper shows how credit quality transition matrices of loans to Italian firms changed during a cyclical downturn (2008-09), compared with a time of growth (2006-07). Once transition matrices were linked to interest rates, banks appear to have been able at calibrating required risk premiums to actual firms’ idiosyncratic risk, both during expansion and recession. However, the uncertainty generated by the crisis accentuated the unexpected component of credit worsening, thus lowering pricing effectiveness. The main finding is that larger banking groups were more affected by the sudden deterioration of credit quality than smaller ones, as far as ability to price risk is concerned. The bank-size effect can be tackled through an efficient use of hard or soft information: both rating users and decentralized banks showed an above-average ability in calibrating rates to risk during the crisis; banks with a strong relationship with borrowers smoothed the risk-price curve in normal times.

Keywords: banking, crisis, credit migration, credit risk pricing

JEL Classification: G21, G01, E43, E32

Suggested Citation

Vacca, Valerio Paolo, An Unexpected Crisis? Looking at Pricing Effectiveness of Different Banks (August 9, 2011). 24th Australasian Finance and Banking Conference 2011 Paper, Available at SSRN: or

Valerio Paolo Vacca (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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