Bank Lending Policy, Credit Scoring and the Survival of Loans

Kasper Roszbach ()

No 154, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: To evaluate loan applicants, banks increasingly use credit scoring models. The objective of such 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 for which reason it is important for banks not only to know if but also when a loan will default. In this paper a bivariate 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 proves to be an effective tool to separate applicants with short survival times from those with long survivals. The bank’s loan provision process is shown to be ineffcient: 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 lending policy.

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)
Pages: 35 pages
Date: 2003-11-01
New Economics Papers: this item is included in nep-cfn, nep-mfd and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Published in Review of Economics and Statistics, 2004, pages 946-958.

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Related works:
Journal Article: Bank Lending Policy, Credit Scoring, and the Survival of Loans (2004)
Working Paper: Bank Lending Policy, Credit Scoring and the Survival of Loans (1998)
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