A model for credit rationing by international banks

The theory of credit rationing asserts that commercial banks tend to underprice the nominal interest rate and, in addition, adjust other factors of the loan contract. These various risk adjusters constitute a `price vector'. A model is provided which demonstrates discrete tradeoffs between the interest rate and non-price adjusters such as loan size, maturity, compensating balances, and up-front loan fees. The model utilizes a modification of the asset pricing model to adjust for loan size. In addition, it observes the term structure of interest rates to develop a method of converting interest rates to years of maturity. Derivations are provided for adjustments in compensating balances and loan fees. A simulation is shown to demonstrate the operationalization of the model for international commercial banks lending to foreign government-guaranteed corporations.