A Default Risk Model with Multi-Loan Lending Operations: A System of Integral Scale with Scope

Recent research on multi-loan lending operations has remained largely silent on the question of what ties together the retail banking functions of scale and scope lending. Our main point is that in a sense, they are just two different manifestations of banking expansion. This is especially true to the extent that banks are heavily involved in consolidation-based lending. In a multi-loan call pricing model, changes in lending scope have direct effects on the bank’s interest margin related to lending scale and thus bank profits and risks. Comparative static analysis shows that scale and scope lending are complements. However, this commingling is not guaranteed to produce higher return and greater safety for the bank. As a result, bank equity return and default risk are overvalued when the integral role on the inclusion of more realistic loan portfolio management in the consolidated banking is ignored.