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Loan prospecting

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  • Heider, Florian
  • Inderst, Roman

Abstract

We offer a theoretical framework to analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problem worsens. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates "excessive lending" as banks' optimal response to an internal agency problem. JEL Classification: D82, G21, L13

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1439.

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Date of creation: May 2012
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Handle: RePEc:ecb:ecbwps:20121439

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Keywords: banking; competition; loan officers; multi-task moral-hazard; soft information;

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References

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Cited by:
  1. Ben-David, Itzhak & Agarwal, Sumit, 2012. "Do Loan Officers' Incentives Lead to Lax Lending Standards?," Working Paper Series 2012-07, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Shawn Cole & Martin Kanz & Leora Klapper, 2012. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," Harvard Business School Working Papers 13-002, Harvard Business School.

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