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Bank Lending Policy, Credit Scoring, and the Survival of Loans


  • Kasper Roszbach

    (Sveriges Riksbank)


To evaluate loan applicants, banks increasingly use credit scoring models. The objective of such 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, for which reason it is important for banks not only to know if but also when a loan will default. In this paper a bivariate 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 time of granted loans. The model proves to be an effective tool to separate applicants with short and with long survival times. 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 lending policy. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • 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.
  • Handle: RePEc:tpr:restat:v:86:y:2004:i:4:p:946-958

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    References listed on IDEAS

    1. Jacobson, Tor & Roszbach, Kasper, 2003. "Bank lending policy, credit scoring and value-at-risk," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 615-633, April.
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    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 1166-1186, December.
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    2. Giuseppe Bertola & Stefan Hochguertel, 2007. "Household Debt and Credit: Economic Issues and Data Problems," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 36(2), pages 115-146, July.
    3. 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, vol. 17(1), pages 113-143, January.
    4. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    5. Marshall, Andrew & Tang, Leilei & Milne, Alistair, 2010. "Variable reduction, sample selection bias and bank retail credit scoring," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 501-512, June.
    6. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Monash Economics Working Papers 09-11, Monash University, Department of Economics.
    7. Elisa Ughetto & Andrea Vezzulli, 2011. "What role can mutual guarantee consortia play for financing innovation? A firm-level study for Italy," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 3(4), pages 294-319.
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    9. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2014. "Does business regulation matter for banks in the European Union?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 278-324.
    10. Renaud Bourlès & Anastasia Cozarenco, 2017. "Entrepreneurial Motivation and Business Performance: Evidence from a French Microfinance Institution," AMSE Working Papers 1701, Aix-Marseille School of Economics, Marseille, France.
    11. Santos Silva, J.M.C. & Murteira, J.M.R., 2009. "Estimation of default probabilities using incomplete contracts data," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 457-465, June.
    12. 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).
    13. repec:spr:agfoec:v:5:y:2017:i:1:d:10.1186_s40100-017-0080-2 is not listed on IDEAS
    14. Hung-Hao Chang & Rodolfo M. Nayga, 2009. "Television Viewing, Fast-Food Consumption, And Children'S Obesity," Contemporary Economic Policy, Western Economic Association International, vol. 27(3), pages 293-307, July.
    15. 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,, vol. 3(4), pages 1-6, August.
    16. Agata M. Lozinskaia & Evgeniy M. Ozhegov & Alexander M. Karminsky, 2016. "Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages," HSE Working papers WP BRP 55/FE/2016, National Research University Higher School of Economics.
    17. Ragasa, Catherine & Thornsbury, Suzanne & Joshi, Satish, 2013. "Sustainability of EU Food Safety Certification: A survival analysis of firm decisions:," IFPRI discussion papers 1296, International Food Policy Research Institute (IFPRI).
    18. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 21-38.
    19. Renaud Bourlès & Anastasia Cozarenco & Dominique Henriet & Xavier Joutard, 2015. "Business Training Allocation and Credit Scoring: Theory and Evidence from Microcredit in France," Working Papers halshs-01171949, HAL.
    20. Jacobson, Tor & Roszbach, Kasper, 2003. "Bank lending policy, credit scoring and value-at-risk," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 615-633, April.
    21. repec:eee:intfin:v:50:y:2017:i:c:p:13-35 is not listed on IDEAS
    22. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2017. "Do creditor rights and information sharing affect the performance of foreign banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 13-35.
    23. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
    24. repec:pal:jorsoc:v:58:y:2007:i:10:d:10.1057_palgrave.jors.2602306 is not listed on IDEAS

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers


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