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In addition to external factors beyond the bank’s control loan pricing will be affected by inputs from other groups within the bank and by specific factors concerning a particular loan. The funding costs will depend on the bank’s deposit taking effectiveness and on the spread that
treasury takes. From the lending department’s perspective this is a given cost. Operating costs will depend on the productivity of back-office and cost allocation methods (for example, how head office overheads are treated). The lending department is also likely to have a target return on capital employed and to have capital allocated to it. This will usually be both at a business unit level and for specific loans. The level of likely credit losses must also be considered. Pricing has to take these factors into account.