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


  • Tobias Berg


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," 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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    Cited by:

    1. Brown, Martin & Kirschenmann, Karolin & Spycher, Thomas, 2017. "Numeracy and the quality of on-the-job decisions: Evidence from loan officers," ZEW Discussion Papers 17-026, ZEW - Leibniz Centre for European Economic Research.
    2. 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.
    3. 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.
    4. 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.

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