Do lenders use risk-based pricing in the Italian consumer loan market? The effect of the 2008 crisis

















































Do lenders use risk-based pricing in the Italian consumer loan market? The Effect of the 2008 Crisis – Journal of Credit Risk





  • This article analyzes whether in Italy the price of consumer loans is based on the specific credit risk of the borrower. This question is important because incorrect pricing could threaten financial stability due to negative effects on the profitability of lenders; risk-based pricing also leads to more efficient credit allocation through less rationing and lower prices for low-risk borrowers who are therefore better able to smooth their consumption, with positive effects on growth economic and financial stability.
  • The analysis is based on the Survey of Household Income and Wealth, which has collected data on interest rates paid on consumer credit as well as information on household characteristics since 2006.
  • Evidence shows that consumer loan pricing has become more risk-based since the 2008 financial crisis. as an indicator of permanent income – become significant and economically important in influencing interest rates over the period 2010-12.
  • These are also the most important determinants of the probability of default on consumer loans; lenders also focus on these variables when selecting borrowers. Following the 2008 crisis, lenders therefore paid more attention to the credit risk of borrowers not only in the selection process, but also in setting the price of the loan.

This article analyzes whether in Italy the price of consumer loans is based on the specific credit risk of the borrower. This question is important because incorrect pricing could threaten financial stability due to negative effects on the profitability of lenders; risk-based pricing also leads to more efficient credit allocation through less rationing and lower prices for low-risk borrowers, who are thus better able to smooth their consumption, with positive effects on economic growth and financial stability. Evidence available from data collected since 2006 via the Household Income and Wealth Survey shows that consumer loan pricing has become more risk-based since the 2008 financial crisis. Households (especially net worth, but also the number of people with income and level of education as a proxy for permanent income) become significant and economically important in influencing interest rates over the period 2010–12. These are also the most important determinants of the probability of default on consumer loans; lenders focus on these variables when selecting borrowers. Following the financial crisis of 2008, lenders therefore paid more attention to the credit risk of borrowers not only in the selection process, but also in determining the price of the loan.

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Priscilla C. Carnegie