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Abstract

This article analyses the risk-return efficiency of limits to which loan pricing accounts for credit risk in the Australian-farm sector. A key issue faced by banks is the trade-off between raising returns through higher risk premiums and the possibility of impairing credit quality. The simulation results suggest that the stochastic efficiency of the size of risk-pricing limits is positively related to volatility of farm income when dynamic relationships are considered. This finding implies that Australian banks should price further across the credit-risk spectrum to farm businesses with relatively volatile incomes compared to those with stable incomes.

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