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Loan prospecting

  • Heider, Florian
  • Inderst, Roman

We offer a theoretical framework to analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problem worsens. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates "excessive lending" as banks' optimal response to an internal agency problem. JEL Classification: D82, G21, L13

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Paper provided by European Central Bank in its series Working Paper Series with number 1439.

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Date of creation: May 2012
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Handle: RePEc:ecb:ecbwps:20121439
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  1. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
  2. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  3. Robert Hauswald & Robert Marquez, 2003. "Information Technology and Financial Services Competition," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 921-948, July.
  4. Inderst, Roman & Ottaviani, Marco, 2009. "Misselling through agents," IMFS Working Paper Series 36, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
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  8. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  9. Andrew Hertzberg & Jose Maria Liberti & Daniel Paravisini, 2010. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation," Journal of Finance, American Finance Association, vol. 65(3), pages 795-828, 06.
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  11. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers.
  12. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc.
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  17. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, vol. 61(5), pages 2511-2546, October.
  18. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  19. Roman Inderst & Marco Ottaviani, 2009. "Misselling through Agents," American Economic Review, American Economic Association, vol. 99(3), pages 883-908, June.
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  23. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
  24. Stiroh, Kevin J & Strahan, Philip E, 2003. " Competitive Dynamics of Deregulation: Evidence from U.S. Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 801-28, October.
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