European Central Bank (ECB)
University of Frankfurt; Imperial College London
May 22, 2012
ECB Working Paper No. 1439
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.
Number of Pages in PDF File: 52
Keywords: Banking, soft information, loan officers, multi-task moral-hazard, competition
JEL Classification: D82, G21, L13working papers series
Date posted: July 9, 2012
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