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Bank Lending Policy, Credit Scoring and the Survival of Loans

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Author Info
Roszbach, Kasper () (Dept. of Economics, Stockholm School of Economics)

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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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Publisher 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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Related research
Keywords: Banks; lending policy; credit scoring; survival; loans.;

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Find related papers by JEL classification:
C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models
C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jacobson, Tor & Roszbach, Kasper, 1998. "Bank Lending Policy, Credit Scoring and Value at Risk," Working Paper Series in Economics and Finance 260, Stockholm School of Economics. [Downloadable!]
    Other versions:
  2. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February. [Downloadable!] (restricted)
    Other versions:
  3. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January. [Downloadable!] (restricted)
  4. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Blackwell Publishing, vol. 52(4), pages 647-63, October. [Downloadable!] (restricted)
  5. Carling, Kenneth & Jacobson, Tor & Roszbach, Kasper, 2001. "Dormancy risk and expected profits of consumer loans," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 717-739, April. [Downloadable!] (restricted)
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  7. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December. [Downloadable!] (restricted)
  8. Dionne, Georges & Artis, Manuel & Guillen, Montserrat, 1996. "Count data models for a credit scoring system," Journal of Empirical Finance, Elsevier, vol. 3(3), pages 303-325, September. [Downloadable!] (restricted)
    Other versions:
  9. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J. M. R. Murteira & Joao M. C. Santos Silva, 2000. "Estimation of Default Probabilities Using Incomplete Contracts Data," Econometric Society World Congress 2000 Contributed Papers 1121, Econometric Society. [Downloadable!]
    Other versions:
  2. 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). [Downloadable!]
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