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Bank Lending Policy, Credit Scoring and Value at Risk

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  • Jacobson, Tor

    ()
    (Research Department, Central Bank of Sweden)

  • Roszbach, Kasper

    (Department of Economics)

Abstract

In this paper we apply a bivariate probit model to investigate the implications of bank lending policy. In the first equation we model the bank´s decision to grant a loan, in the second the probability of default. We confirm that banks provide loans in a way that is not consistent with default risk minimization. The lending policy must thus either be inefficient or be the result of some other type of optimizing behavior than expected profit maximization. Value at Risk, being a value weighted sum of individual risks, provides a more adequate measure of monetary losses on a portfolio of loans than default risk. We derive a Value at Risk measure for the sample portfolio of loans and show how analyzing this can enable financial institutions to evaluate alternative lending policies on the basis of their implied credit risk and loss rate, and make lending rates consistent with the implied Value at Risk.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 68.

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Length: 25 pages
Date of creation: 01 Jul 1998
Date of revision:
Publication status: Forthcoming in Journal of Banking and Finance.
Handle: RePEc:hhs:rbnkwp:0068

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
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Keywords: Banks; Lending policy; Credit scoring; Value at Risk; Bivariate probit;

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References

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  1. Kasper Roszbach, 2004. "Bank Lending Policy, Credit Scoring, and the Survival of Loans," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 946-958, November.
  2. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  3. 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.
  4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(4), pages 27-48, Fall.
  5. 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.
  6. 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.
  7. 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.
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Cited by:
  1. Zongjun Wang & Gongkhonkwa Rujira, 2013. "The Dynamic Relationship of Stock Indexes on Interbank Money Market Rates: Evidence from Thailand," International Journal of Economics and Financial Issues, Econjournals, Econjournals, vol. 3(4), pages 827 - 843.
  2. João Fernandes, 2005. "Corporate Credit Risk Modeling: Quantitative Rating System And Probability Of Default Estimation," Finance, EconWPA 0505013, EconWPA.
  3. Bücker, Michael & van Kampen, Maarten & Krämer, Walter, 2013. "Reject inference in consumer credit scoring with nonignorable missing data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(3), pages 1040-1045.
  4. Erol Muzir, 2013. "Impact of Placement Choices and Governance Issues on Credit Risk in Banking: Nonparametric Evidence from an Emerging Market," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, ScientificPapers.org, vol. 3(4), pages 6, August.
  5. Charles Grant & Mario Padula, 2012. "Using Bounds to Investigate Household Debt Repayment Behaviour," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 12-06, Centre for Economic Development and Institutions(CEDI), Brunel University.
  6. McAndrew, Clare & Thompson, Rex, 2007. "The collateral value of fine art," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(3), pages 589-607, March.
  7. 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.
  8. Tuan, Tran Huu & Navrud, Stale, 2009. "Applying the dissonance-minimising format to value cultural heritage in developing countries," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society, vol. 53(3), September.
  9. Kuhn, M.E. & Darroch, Mark A.G. & Ortmann, Gerald F., 2000. "Assessing the efficacy of a South African microlender's loan screening mechanism," Agrekon, Agricultural Economics Association of South Africa (AEASA), Agricultural Economics Association of South Africa (AEASA), vol. 39(4), December.
  10. Roszbach, Kasper, 2003. "Bank Lending Policy, Credit Scoring and the Survival of Loans," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 154, Sveriges Riksbank (Central Bank of Sweden).
  11. Carling, Kenneth & Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2002. "Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 142, Sveriges Riksbank (Central Bank of Sweden).
  12. Odeh, Oluwarotimi O. & Featherstone, Allen M. & Sanjoy, Das, 2006. "Predicting Credit Default in an Agricultural Bank: Methods and Issues," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida, Southern Agricultural Economics Association 35359, Southern Agricultural Economics Association.
  13. Azam, Rehan & Muhammad, Danish & Syed Akbar, Suleman, 2012. "The significance of socioeconomic factors on personal loan decision a study of consumer banking local private banks in Pakistan," MPRA Paper 42322, University Library of Munich, Germany.
  14. González-Cabán, Armando & Loomis, John B. & Rodriguez, Andrea & Hesseln, Hayley, 2007. "A comparison of CVM survey response rates, protests and willingness-to-pay of Native Americans and general population for fuels reduction policies," Journal of Forest Economics, Elsevier, Elsevier, vol. 13(1), pages 49-71, May.
  15. Hartmann-Wendels, Thomas & Mählmann, Thomas & Versen, Tobias, 2009. "Determinants of banks' risk exposure to new account fraud - Evidence from Germany," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(2), pages 347-357, February.
  16. Evžen Kocenda & Martin Vojtek, 2009. "Default Predictors and Credit Scoring Models for Retail Banking," CESifo Working Paper Series 2862, CESifo Group Munich.

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