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Does credit scoring improve the selection of borrowers and credit quality?

Author

Listed:
  • Giorgio Albareto

    (Bank of Italy)

  • Roberto Felici

    (Bank of Italy)

  • Enrico Sette

    (Bank of Italy)

Abstract

This paper studies the effect of credit scoring by banks on bank lending to small businesses by addressing the following questions: does credit scoring increase or decrease the propensity of banks to grant credit? Does it improve the selection of borrowers? Does credit scoring improve or reduce the likelihood that a borrower defaults on its loan? We answer these questions using a unique dataset that collects data from both a targeted survey on credit scoring models and the Central Credit Register. We rely on instrumental variables to control for the potential endogeneity of credit scoring. We find that credit scoring does not change the propensity of banks to grant loans to the generality of borrowers but helps them select borrowers. We also find that credit scoring reduces the likelihood that a borrower defaults, in particular for smaller borrowers and for banks that declare to use credit scoring mainly as a tool to monitor borrowers. These results are homogeneous across bank characteristics such as size, capital, and profitability. Overall our results suggest that credit scoring has a positive effect on the selection of borrowers and on credit performance.

Suggested Citation

  • Giorgio Albareto & Roberto Felici & Enrico Sette, 2016. "Does credit scoring improve the selection of borrowers and credit quality?," Temi di discussione (Economic working papers) 1090, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1090_16
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1090/en_tema_1090.pdf
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    References listed on IDEAS

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    Cited by:

    1. Porzio, Claudio & Sampagnaro, Gabriele & Verdoliva, Vincenzo, 2020. "Lost in Translation: The determinants and the effect of soft information dispersion in bank lending," Global Finance Journal, Elsevier, vol. 43(C).
    2. Amanda Carmignani & Guido de Blasio & Cristina Demma & Alessio D'Ignazio, 2019. "Urban agglomerations and firm access to credit," Temi di discussione (Economic working papers) 1222, Bank of Italy, Economic Research and International Relations Area.
    3. Amanda Carmignani & Guido de Blasio & Cristina Demma & Alessio D'Ignazio, 2021. "Urbanization and firm access to credit," Journal of Regional Science, Wiley Blackwell, vol. 61(3), pages 597-622, June.

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    More about this item

    Keywords

    credit scoring; credit supply; bank risk-taking; loan defaults;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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