Heiskanen, Juhani (1999). Luottoriskien hinnoittelumallin hyväksikäyttö pankin vakavaraisuuslaskennassa ja tilinpäätöksissä (Utilization of the pricing model of credit risks in the solvency calculation and financial statements). Acta Wasaensia No 72, 173 p.

The solution of the valuation problem in the solvency calculation and financial statements of banks has proved to be a very difficult task. A clear indication of the matter is the fact that the realization of credit risks into bad debts has resulted in the biggest financial losses of all times to Finnish banks in the 199Os.

In economics the principles of risk credit pricing are derived from the more common pricing theory of derivative instruments. The pricing theory of credit risks includes solutions to the definition of credit risk premiums. In this research the theory is utilized to solve the valuation problem of outstanding corporate debts. According to the theory, the profitability development, rate of indebtedness and credit maturity of the company affect the value of the outstanding debt. The evaluation of the profitability development of the borrower is the biggest problem. According to the theory, when profitability is being evaluated, only the dispersion of unexpected profitability fluctuations have any importance.

This research describes how the pricing model of credit risks can be used to support the decision making of the bank management to solve the valuation problem of outstanding corporate debts. A normative-theoretic frame of reference is presented to make use of the solution in the solvency calculation and financial statements of the bank. The information obtained by means of the calculation model is utilized in the statutory solvency calculation of the bank so that the corporate credits which belong to category four and which have proved to be problematic are separated, as far as it is possible, to be a group of their own, and their values are defined credit-related by means of the pricing model. This means specification in the risk classification according to the solvency calculation norms, as far as business credits are concerned. In the frame of reference the change is adjusted to the present solvency calculation system. The solution of the valuation problem by means of the pricing model of credit risks offers a new point of view to develop the solvency calculation system and to utilize the information used in it concerning outstanding corporate debts also in the financial statements of banks.

The calculations made for solvency calculation constitute in the frame of reference a separate account corresponding to the accounts payable and receivable and balance sheet specifications of outstanding corporate debts, and this specification is also utilized in the financial statements. From the part of the financial statement treatment this procedure meets the requirements of banks as regards the IAS-30 norms. Based on the requirements for the right and sufficient information/image it provides directions for the treatment of direct bad debt entries, obligatory allocated bad debt reserves, general bad debt reserves and general loss reserves in the financial statements of the bank.

Keywords: Pricing model of credit risks, bank, solvency calculation, financial statements.