Rules Versus Discretion in Bank Lending Decisions

43 Pages Posted: 20 Mar 2011

See all articles by Manju Puri

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Jörg Rocholl

ESMT European School of Management and Technology

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: February 15, 2011

Abstract

This paper analyzes the importance of discretion in bank lending decisions. We use a unique dataset of more than 1 million loan applications to customers of German savings banks and can observe accept and reject decisions as well as loan performance. We document that discretion is widespread and economically significant, in particular for customers with an existing relationship with their bank and medium credit quality. This discretion is based on soft information mainly for customers with no credit history (e.g. younger customers) and on hard information mainly for customers with a given credit history (e.g. with significant use of their credit lines). Finally, we find no evidence that loans approved based on the loan officer’s discretion perform any differently than other loans. These results help us in better understanding the loan making process and thus to shed light on an important, open question of interest to academicians, banks, consumers and regulators.

Keywords: Bank lending, discretion, soft information, default rates

Suggested Citation

Puri, Manju and Rocholl, Joerg and Steffen, Sascha, Rules Versus Discretion in Bank Lending Decisions (February 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786831 or http://dx.doi.org/10.2139/ssrn.1786831

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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