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Bank Lending Policy, Credit Scoring and the Survival of Loans

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  • Roszbach, Kasper

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

To evaluate loan applicants, banks use a large variety of systems. The objective of such credit scoring models typically is to minimize default rates or the number of incorrectly classified loans. Thereby they fail to take into account that loans are multiperiod contracts. From a utility maximizing perspective it is not only important to know if but also when a loan will default. In this paper a Tobit model with a variable censoring threshold and sample selection effects is estimated for (1) the decision to provide a loan or not and (2) the survival of granted loans. The model is shown to be an affective tool to separate applicants with short survival times from those with long survivals The bank´s loan provision process is shown to be inefficient. Loans are granted in a way that conflicts with both default risk minimization and survival time maximization. There is thus no trade-off between higher default risk and higher return in the policy of banks.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 261.

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Length: 28 pages
Date of creation: 29 Sep 1998
Date of revision:
Publication status: Forthcoming in The Review of Economics and Statistics.
Handle: RePEc:hhs:hastef:0261

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Keywords: Banks; lending policy; credit scoring; survival; loans.;

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References

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  1. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 3-14, January.
  2. Montserrat Guillen & Manuel Artis, 1994. "Count Data Models For A Credit Scoring System," Risk and Insurance, EconWPA 9407004, EconWPA.
  3. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 572, Queen's University, Department of Economics.
  4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  5. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1166-86, December.
  6. Jacobson, Tor & Roszbach, Kasper, 1998. "Bank Lending Policy, Credit Scoring and Value at Risk," Working Paper Series 68, Sveriges Riksbank (Central Bank of Sweden).
  7. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  8. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 74(1), pages 101-24, January.
  9. Carling, Kenneth & Jacobson, Tor & Roszbach, Kasper, 2001. "Dormancy risk and expected profits of consumer loans," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(4), pages 717-739, April.
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Citations

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Cited by:
  1. Bertola, Giuseppe & Hochguertel, Stefan, 2007. "Household debt and credit: Economic issues and data problems," CFS Working Paper Series 2007/32, Center for Financial Studies (CFS).
  2. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 82(1), pages 21-38.
  3. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
  4. Carling, Kenneth & Rönnegård, Lars & Roszbach, Kasper, 2004. "Is Firm Interdependence within Industries Important for Portfolio Credit Risk?," Working Paper Series 168, Sveriges Riksbank (Central Bank of Sweden).
  5. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Development Research Unit Working Paper Series, Monash University, Department of Economics 09-11, Monash University, Department of Economics.
  6. Jacobson, Tor & Roszbach, Kasper, 1998. "Bank Lending Policy, Credit Scoring and Value at Risk," Working Paper Series 68, Sveriges Riksbank (Central Bank of Sweden).
  7. Diana Bonfim, 2006. "Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  8. Ragasa, Catherine & Thornsbury, Suzanne & Joshi, Satish, 2013. "Sustainability of EU Food Safety Certification: A survival analysis of firm decisions:," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 1296, International Food Policy Research Institute (IFPRI).
  9. Santos Silva, J.M.C. & Murteira, J.M.R., 2009. "Estimation of default probabilities using incomplete contracts data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(3), pages 457-465, June.
  10. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(1), pages 113-143, January.
  11. Marshall, Andrew & Tang, Leilei & Milne, Alistair, 2010. "Variable reduction, sample selection bias and bank retail credit scoring," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(3), pages 501-512, June.

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