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Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality

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  • Tobias Berg

Abstract

This paper studies the dual role of risk managers and loan officers in a bank's organizational structure. Using 75,000 retail mortgage applications, I analyze the effect of risk-management involvement on loan default rates. The bank requires risk-management approval for loans that are considered risky based on hard information, using a sharp threshold that changes during the sample period. Using a regression discontinuity design and a difference-in-differences estimator, I am able to show that risk-management involvement reduces loan default rates by more than 50%. My findings suggest that a two-agent model can help to facilitate efficient screening decisions.

Suggested Citation

  • Tobias Berg, 2015. "Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality," The Review of Financial Studies, Society for Financial Studies, vol. 28(12), pages 3367-3406.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:12:p:3367-3406.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv040
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    Citations

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    Cited by:

    1. Nicola Pierri & Yannick Timmer, 2020. "Tech in Fin before FinTech: Blessing or Curse for Financial Stability?," CESifo Working Paper Series 8067, CESifo.
    2. Alin Marius Andries & Martin Brown, 2017. "Credit booms and busts in emerging markets," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(3), pages 377-437, July.
    3. Porzio, Claudio & Sampagnaro, Gabriele & Verdoliva, Vincenzo, 2020. "Lost in Translation: The determinants and the effect of soft information dispersion in bank lending," Global Finance Journal, Elsevier, vol. 43(C).
    4. Goedde-Menke, Michael & Ingermann, Peter-Hendrik, 2024. "Loan officer specialization and credit defaults," Journal of Banking & Finance, Elsevier, vol. 161(C).
    5. Tobias Berg & Andreas Fuster & Manju Puri, 2022. "FinTech Lending," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 187-207, November.
    6. Berg, Tobias & Koziol, Philipp, 2017. "An analysis of the consistency of banks’ internal ratings," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 27-41.
    7. Satyam Kumar & Yelleti Vivek & Vadlamani Ravi & Indranil Bose, 2023. "Causal Inference for Banking Finance and Insurance A Survey," Papers 2307.16427, arXiv.org.
    8. Bushman, Robert & Gao, Janet & Martin, Xiumin & Pacelli, Joseph, 2021. "The influence of loan officers on loan contract design and performance," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    9. Brown, Martin & Kirschenmann, Karolin & Spycher, Thomas, 2017. "Numeracy and the quality of on-the-job decisions: Evidence from loan officers," Working Papers on Finance 1711, University of St. Gallen, School of Finance.
    10. Jarque, Arantxa & Prescott, Edward Simpson, 2020. "Banker compensation, relative performance, and bank risk," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).
    11. Pierri, Nicola & Timmer, Yannick, 2022. "The importance of technology in banking during a crisis," Journal of Monetary Economics, Elsevier, vol. 128(C), pages 88-104.
    12. Jere R. Francis & Wei Wang, 2021. "Common Auditors and Private Bank Loans," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 793-832, March.
    13. Iftekhar Hasan & Emma Peng & Maya Waisman & Meng Yan, 2024. "The effect of bank organizational risk-management on the pricing of non-deposit debt," Journal of Financial Services Research, Springer;Western Finance Association, vol. 66(1), pages 1-27, August.
    14. Gropp, Reint & Guettler, Andre, 2018. "Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 26-39.
    15. Diana Bonfim & Gil Nogueira & Steven Ongena, 2016. "Sorry, We're Closed: Loan Conditions When Bank Branches Close and Firms Transfer to Another Bank," Working Papers w201607, Banco de Portugal, Economics and Research Department.
    16. César Portalanza Chinguel & Fernando Castro Muro & Nidia Sotelo Tapia, 2019. "Gobierno Corporativo y Riesgo Crediticio en el Sistema Financiero Peruano. Una Primera Aproximación," Revista de Análisis Económico y Financiero, Universidad de San Martín de Porres, vol. 1(02), pages 49-55.

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