Loan prospecting

Florian Heider and Roman Inderst

No 1439, Working Paper Series from European Central Bank

Abstract: We offer a theoretical framework to analyze corporate lending when loan officers must be incentivized to prospect for loans and to transmit the soft information they obtain in that process. We explore how this multi-task agency problem shapes loan officers' compensation, banks' use of soft information in credit approval, and their lending standards. When competition intensifies, prospecting for loans becomes more important and banks' internal agency problem worsens. In response to more competition, banks lower lending standards, may choose to disregard soft and use only hard information in their credit approval, and in that case reduce loan officers to salespeople with steep, volume-based compensation. Our model generates "excessive lending" as banks' optimal response to an internal agency problem. JEL Classification: D82, G21, L13

Keywords: banking; competition; loan officers; multi-task moral-hazard; soft information (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-ban and nep-cta
Note: 276127
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: Loan Prospecting (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121439

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