Loan pricing is a critically important function in a financial institution's operations. Loan-pricing decisions directly affect the safety and soundness of financial institutions through their impact on earnings, credit risk, and, ultimately, capital adequacy. As such, institutions must price loans in a manner sufficient to cover costs, provide the capitalization needed to ensure the institution's financial viability, protect the institution against losses, provide for borrower needs, and allow for growth. Institutions must have appropriate policy direction, controls, and monitoring and reporting mechanisms to ensure appropriate loan pricing. Determining the effectiveness of loan pricing is a critical element in assessing and rating an institution's capital, asset quality, management, earnings, liquidity, and sensitivity to market risks. Loans should be priced at a level sufficient to cover all costs, fund needed provisions to the allowance accounts, and facilitate the accretion of capital. Specific consideration should be given to the cost of funds, the cost of servicing loans, costs of operations, credit risks, interest rate risks, and the competitive environment.