The core challenge in lending isn't taking risk—it's getting paid for it.

The Federal Reserve Board published a detailed look at how banks price loans against expected default. The research confirms what we know: there’s a strong, necessary correlation between credit risk and the interest rate spread.

The bottom line? For every loan, the pricing model must be calibrated to cover idiosyncratic and market risks. If the pricing is off, the return isn't worth the capital use.

A must-read for anyone running a lending portfolio.