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Credit scoring and the availability, price, and risk of small business credit

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  • Allen N. Berger
  • W. Scott Frame
  • Nathan H. Miller

Abstract

The authors examine the economic effects of small business credit scoring (SBCS) and find that it is associated with expanded quantities, higher average prices, and greater risk levels for small business credits under $100,000. These findings are consistent with a net increase in lending to relatively risky “marginal borrowers” who would otherwise not receive credit, but who would pay relatively high prices when they are funded. The authors also find that 1) bank-specific and industrywide learning curves are important; 2) SBCS effects differ for banks that adhere to “rules” versus “discretion” in using the technology; and 3) SBCS effects differ for slightly larger credits.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-6.

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Date of creation: 2002
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Publication status: Published in Journal of Money, Credit & Banking (April 2005)
Handle: RePEc:fip:fedawp:2002-6

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Keywords: Credit scoring systems ; Small business;

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References

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  1. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages F32-F53, February.
  2. D. J. Hand & W. E. Henley, 1997. "Statistical Classification Methods in Consumer Credit Scoring: a Review," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 160(3), pages 523-541.
  3. Myron L. Kwast & Martha Starr-McCluer & John D. Wolken, 1997. "Market definition and the analysis of antitrust in banking," Finance and Economics Discussion Series 1997-52, Board of Governors of the Federal Reserve System (U.S.).
  4. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 2000. "Credit Scoring: Statistical Issues and Evidence from Credit-Bureau Files," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(3), pages 523-547.
  5. Wheelock, David C & Wilson, Paul W, 1999. "Technical Progress, Inefficiency, and Productivity Change in U.S. Banking, 1984-1993," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 212-34, May.
  6. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-25, August.
  7. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The Effects of Bank Mergers and Acquisitions on Small Business Lending," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-1, New York University, Leonard N. Stern School of Business-.
  8. Berger, Allen N. & Mester, Loretta J., 2003. "Explaining the dramatic changes in performance of US banks: technological change, deregulation, and dynamic changes in competition," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 57-95, January.
  9. Jalal Akhavein & W. Scott Frame & Lawrence J. White, 2001. "The Diffusion of Financial Innovations: An Examination of The Adoption of Small Business Credit Scoring by Large Banking Organizations," Center for Financial Institutions Working Papers 01-19, Wharton School Center for Financial Institutions, University of Pennsylvania.
  10. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
  11. W. Scott Frame & Michael Padhi & Lynn Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," Working Paper 2001-6, Federal Reserve Bank of Atlanta.
  12. Gautam Gowrisankaran & Joanna Stavins, 1999. "Network externalities and technology adoption: lessons from electronic payments," Working Papers 99-5, Federal Reserve Bank of Boston.
  13. Thomas F. Brady & William B. English & William R. Nelson, 1998. "Recent changes to the Federal Reserve's survey of terms of business lending," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 604-615.
  14. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
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