Bank Lending Policy, Credit Scoring and Value at Risk

Tor Jacobson () and Kasper Roszbach ()

No 260, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: In this paper we apply a bivariate probit model to investigate the implications of bank lending policy. In the first equation we model the bank´s decision to grant a loan, in the second the probability of default. We confirm that banks provide loans in a way that is not consistent with default risk minimization. The lending policy must thus either be inefficient or be the result of some other type of optimizing behavior than expected profit maximization. Value at Risk, being a value weighted sum of individual risks, provides a more adequate measure of monetary losses on a portfolio of loans than default risk. We derive a Value at Risk measure for the sample portfolio of loans and show how analyzing this can enable financial institutions to evaluate alternative lending policies on the basis of their implied credit risk and loss rate, and make lending rates consistent with the implied Value at Risk.

Keywords: Banks; lending policy; credit scoring; Value at Risk; bivariate (search for similar items in EconPapers)
JEL-codes: C35 D61 D81 G21 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mon
Date: Written
View citations in EconPapers

Published in Journal of Banking & Finance, 2003, pages 615-633.

Downloads: (external link)
http://swopec.hhs.se/hastef/papers/hastef0260.pdf.zip (application/pdf)
http://swopec.hhs.se/hastef/papers/hastef0260.pdf (application/pdf)
http://swopec.hhs.se/hastef/papers/hastef0260.ps.zip (application/postscript)
http://swopec.hhs.se/hastef/papers/hastef0260.ps (application/postscript)

Related works:
Working Paper: Bank Lending Policy, Credit Scoring and Value at Risk (1998)
Journal Article: Bank lending policy, credit scoring and value-at-risk (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0260

Access Statistics for this paper

More papers in Working Paper Series in Economics and Finance from Stockholm School of Economics
Address: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Contact information at EDIRC.
Series data maintained by Helena Lundin ().