Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures

Loan Origination under Soft- and Hard-Information Lending

This paper presents a novel model of the lending process that takes into account that loan officers must spend time and effort to originate new loans. Besides generating predictions on loan officers’ compensation and its interaction with the loan review process, the model sheds light on why competition could lead to excessively low lending standards. We also show how more intense competition ma...

Federal Home Loan Bank Lending to Community Banks : Are Targeted

Do Loan Officers’ Incentives Lead to Lax Lending Standards?

We study a controlled corporate experiment in which loan officers was altered from fixed salary to volume-based pay. The incentives increased aggressiveness of origination: higher origination rates (+31%), loan sizes (+15%), and default rate (+28%). The effects are partly driven by moral hazard: approval decision is driven by loan officers’ discretion; however, default is uncorrelated with disc...

From Loan Screening to Loan Prospecting

We study a controlled corporate experiment in which loan officers were compensated to engage in loan prospecting in addition to the traditional loan screening. Loan prospecting led to larger loan sizes (+15%) and higher origination rates (+31%) while keeping the traditional credit quality threshold and interest rate intact. Loan officers attempt to influence the decision making process: loan of...

Market concentration and commercial bank loan portfolios

This paper estimates the relationship between banking market concentration and high-risk portfolio strategies at commercial banks. I use the unprecedented changes in the degree of competition in local banking markets that occurred after 1980 to estimate the impact of market competition on the risk profile of commercial bank lending. I find evidence that increasing concentration has been associa...