This is the first of a series of Blogs to address the tendency of financial institutions to develop in-house commercial loan pricing models versus adopting proven models available in the marketplace. Up front I will tell you I am biased in seeking external models in that I have worked with the Hurdle Group, Inc. to make available to financial institutions an internet-based commercial loan pricing system. The best methodologies available are instituted into the model, not biased by the internal politics as to what methodologies an institution may use. An example of bias is the cost of funding the loan. There are numerous proposed methods, understanding there is no perfect method. Internally, there may be a bias to use current funding or incremental funding costs. The problem in either of these cases is the miss-match of re-pricing characteristics of the loan versus the funding source. By using an external model, the decision is made for the institution and is based on sound judgment, not the emotions of internal staff.
Phill Rowley