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Abstract
We propose a simulation model of the retail lending market with two types of agents: borrowers searching for low interest rates and lenders competing through risk-based pricing. We show that individual banks observe adverse selection, even if every lender applies the same pricing strategy and a credit scoring model of comparable discrimination power. Additionally, the model justifies the reverse-S shape of the response rate curve. According to the model, the benefits of even small increases in the discrimination power of credit scoring are substantial. This effect is more pronounced if the number of offers checked by the applicants before making a decision increases. The simulations illustrate the trade-off between profitability, market share, and credit loss rates. The profit-maximising strategy is to set interest rates slightly lower than the competition; the excessive price reduction turns out to be counterproductive. At the same time, there exists a niche for higher yield players.
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- Publication version
- Accepted or Published Version
- DOI:
- Digital Object Identifier (open in new tab) 10.32065/CJEF.2021.02.01
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- Category:
- Articles
- Type:
- artykuły w czasopismach
- Published in:
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FINANCE A UVER-CZECH JOURNAL OF ECONOMICS AND FINANCE
no. 71,
pages 96 - 118,
ISSN: 0015-1920 - Language:
- English
- Publication year:
- 2021
- Bibliographic description:
- Kochański B.: A Simulation Model for Risk and Pricing Competition in the Retail Lending Market// FINANCE A UVER-CZECH JOURNAL OF ECONOMICS AND FINANCE -Vol. 71,iss. 2 (2021), s.96-118
- DOI:
- Digital Object Identifier (open in new tab) 10.32065/cjef.2021.02.01
- Verified by:
- Gdańsk University of Technology
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