Improving the Profitability of Bank Lending in a Competitive Environment

Some refinements to a previously described decision support system, Price‐Strat, in order to tackle the important problem of assets profiling for a bank or building society are outlined. Essentially, the Price‐Strat methodology and the related decision support tool have been modified and extended such that they can be used to model the market's response to a bank or a building society's lending products within a highly competitive market. The approach allows the bank or building society to use these models so as to determine the best mix of competitive interest rates in order to lend out a specified amount of money in the most expensive way, i.e., how to achieve budgeted assets growth in the most profitable way whilst maintaining the quality of the portfolio of one's assets. An example is given to illustrate the approach.