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Theoretical and Applied Economics
No. 8 / 2012 (573)

Prepayment risk, impact on credit products

Dan Costin NIŢESCU
Bucharest Academy of Economic Studies

Abstract. Credit pricing is always an important aspect of operations of banks, as loans are generally two thirds of bank assets. Therefore, the study of factors influencing a bank customer behavior and their impact on early repayment of loans may have a significant influence in reducing the risk assumed by such unexpected operations.

Objective analysis of prepayment risk is to estimate the probability of repayment to better manage its manifestation. The existence of potential customers that use this option exposes the bank to a number of risks, such as interest rate risk, the maturity mismatch risk and liquidity risk.

Proper evaluation and forecasting the evolution of this risk can bring great benefits for a credit institution in the management of loan products and customer relationship: lower risk of over-ensure against fixed rate mortgage, a better management of short-term and long term liquidity needs (thus reducing the risk of over-financing) can offer customers more competitive pricing (achieved by reducing funding costs due to better assessment and management of risks involved early repayment).

Keywords: prepayment risk; credit products; consumer behavior; indebtedness; refinancing; loans portfolio.

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