Consistency Analysis between EVA Metrics and Credit Pricing

Abstract

Many institutions currently choose an EVA-based risk-adjusted credit pricing that does not reconcile the prices of loans with those of similar instruments available in the market, such as bonds, other loans, or credit derivatives. Thus, it cannot assess arbitrage situations arising from relative price mismatches. In this section two approaches to EVA-based risk-adjusted pricing for banks corporate loans are analyzed:

• EVA approach-based on pillar 1 parameters (PD, LGD, EAD) and on historical transition matrix (backward-looking approach);

• EVA approach-based on pillar 1 parameters (PD, LGD, EAD) and on market-oriented transition matrix (forward-looking approach) (see Figure 6.1).