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Loan prospecting

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Abstract

We o¤er a theoretical framework to analyze corporate lending when loan o¢ cers 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 o¢ cers’compensation, banks’use of soft information in credit approval, and their lending standards. When competition intensi es, 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 o¢ cers 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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Length: 52 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:ecb:ecbwps:20121439

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Keywords: Banking; Soft information; Loan o¢ cers; Multi-task Moral-hazard; Competition.;

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References

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  22. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
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