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Bank Lending Policy, Credit Scoring and the Survival of Loans

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  • Roszbach, Kasper

    () (Dept. of Economics, Stockholm School of Economics)

Abstract

To evaluate loan applicants, banks use a large variety of systems. The objective of such credit scoring 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. From a utility maximizing perspective it is not only important to know if but also when a loan will default. In this paper a 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 of granted loans. The model is shown to be an affective tool to separate applicants with short survival times from those with long survivals 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 policy of banks.

Suggested Citation

  • Roszbach, Kasper, 1998. "Bank Lending Policy, Credit Scoring and the Survival of Loans," SSE/EFI Working Paper Series in Economics and Finance 261, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0261
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    References listed on IDEAS

    as
    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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    5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    6. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January.
    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.
    8. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    9. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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    Cited by:

    1. Mocetti, Sauro & Viviano, Eliana, 2017. "Looking behind mortgage delinquencies," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 53-63.
    2. 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.
    3. 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.
    4. repec:pal:jorsoc:v:61:y:2010:i:3:d:10.1057_jors.2009.66 is not listed on IDEAS
    5. 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.
    6. 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.
    7. repec:spr:agfoec:v:5:y:2017:i:1:d:10.1186_s40100-017-0080-2 is not listed on IDEAS
    8. 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, vol. 3(4), pages 1-6, August.
    9. 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.
    10. 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).
    11. 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.
    12. 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.
    13. 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.
    14. Bechlioulis, Alexandros & Brissimis, Sophocles, 2014. "Consumer default and optimal consumption decisions," MPRA Paper 56864, University Library of Munich, Germany.
    15. 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.
    16. 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.
    17. Jakob B Madsen, 2011. "A Repayment Model of House Prices," Monash Economics Working Papers 09-11, Monash University, Department of Economics.
    18. 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.
    19. 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.
    20. 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).
    21. 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.
    22. Madsen, Jakob B., 2012. "A behavioral model of house prices," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 21-38.
    23. repec:pal:jorsoc:v:58:y:2007:i:10:d:10.1057_palgrave.jors.2602306 is not listed on IDEAS

    More about this item

    Keywords

    Banks; lending policy; credit scoring; survival; loans.;

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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