T he original capital asset pricing model (hereafter CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin (1966) was advanced to explain the return differential between risky assets and a risk-free asset under conditions of uncertainty. The model demonstrates that in equilibrium the return differential on a risky asset is determined by two factors: the market price of (unit) risk (hereafter MPR) which is common to all risky assets, and a risk factor unique to each asset. The equilibrium return differential is

The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.

The 2008 global financial crisis demonstrated that monetary policy and financial stability policy are more highly interrelated than previously thought. This paper analyzes the interactions between these policies using a non-linear overlapping-generations model with financial frictions in the form of banking financial intermediation. The paper embeds negative externalities due to contagion effects in physical investments which creates the need for financial stability policy. We show how the monetary policy transmission mechanism depends on financial stability policy tools as well as on regulatory and institutional constraints. We find policy tradeoffs in trying to accomplish both monetary and financial stability targets. The central bank must take these tradeoffs into account when selecting the tools in its policy toolbox. Another important finding is the interchangeability of price stability and financial stability policy tools.

In this paper, we derive a model of the individual banking firm facing stochastic inflation. The bank is considered as a depository financial intermediary operating in the primary market as a multiproduct price discriminating firm. A secondary market is also considered where liquidity surpluses and deficits are traded. Two types of assets and liabilities are assumed: deposits and loans linked to a general price level and nonlinked instruments. Effects of changes in the parameters such as inflation rate and variability, reserve requirements are analyzed.