Swiss Finance Institute @ EPFL

The Swiss Finance Institute @ EPFL has been created to foster research in finance and to develop a strong offering of programs in finance and financial engineering at the Ecole Polytechnique Fédérale de Lausanne. The focus is on the areas within finance that have a natural interaction with mathematics, statistics, engineering, and science, namely, mathematical finance, financial econometrics, and entrepreneurial finance.

The Swiss Finance Institute @ EPFL participates in two teaching programs, The Master in Financial Engineering at EPFL, which is a highly selective 2-year master program, and The PhD in Finance, which is organized jointly with the Swiss Finance Institute and the Universities of Geneva and Lausanne.

The Swiss Finance Institute @ EPFL benefits from the institutional support of the Swiss Finance Institute, a private foundation created in 2006 by Switzerland’s banking and finance community in cooperation with leading Swiss universities, and from Swissquote, who endowed the Swissquote Chair in Quantitative Finance.

Upfront Fees and Prepayment Risk in Bank Loans

We develop and test a model in which upfront fees are used to compensate lenders for the penalty-free prepayment option in bank loans. In the model, borrowers learn of their type after investing the loan, causing high-quality borrowers to prepay (or renegotiate). Raising the credit spread does not counteract this ex post erosion of loan-pool quality. We show that an upfront fee can reduce prepayment risk, producing an equilibrium without credit rationing. Moreover, performance-sensitive debt, which adjusts the loan rate ex-post, can play a similar role. For a sample of 3,800 loans, we find that upfront fees increase with prepayment risk and are lower for performance-sensitive loans, consistent with the model predictions.

By: Karin THOBURN, Norwegian School of Economics - NHH


Prof. Fahlenbrach - SFI Practitioner Roundups

The core role of a bank is to accept deposits from agents with excess liquidity and loan the resulting capital to agents with a lack of it. For these services, banks pay their creditors and charge their debtors. The remuneration for thes