Bank Lending Policy, Credit Scoring and the Survival of Loans

Kasper Roszbach ()

No 261, Working Paper Series in Economics and Finance from 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.

Keywords: Banks; lending policy; credit scoring; survival; loans. (search for similar items in EconPapers)
JEL-codes: C34 C35 D61 D81 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-fmk and nep-mon
Date: Written

Forthcoming in The Review of Economics and Statistics.

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Related works:
Working Paper: Bank Lending Policy, Credit Scoring and the Survival of Loans (2003)
Journal Article: Bank Lending Policy, Credit Scoring, and the Survival of Loans (2004)
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