Abstract

The Banks' Willingness to Assume Credit Risks

The risk of default banks are prepared to accept in individual lending operations is a matter of dispute in professional writing. The theory whereby banks are willing to accept the risk of default involved in lending operations insofar as they are able to obtain compensation by way of a risk premium included in the interest rate and the theory whereby banks are not prepared to accept any risk of default are supported by various hypotheses applied in individual lending decision-making. The present contribution analyzes these hypotheses and discusses the view expressed in professional writing that the individual lending decision-making theory has not been in a position so far to explain that the hypothesis whereby banks are prepared to accept the risk of default in lending operations up to a limit independent of the rate of interest charged is the more realistic one. The risk limitation helps derive a security criterion in individual lending decision-making which supports the risk classification hypothesis within the framework set by the individual lending decision-making theory. Risk limitation also makes it possible to put the risk horizon discussed in professional writing on an uncertainty theory basis. Moreover, the approach supporting the risk avoidance theory may be identified as a special case of risk limitation. Possibilities to develop the theoretical concept further and ways in which the instrument developed can support lending decisions in practice are outlined in conclusion.