On the Relevance of Soft Information in Credit Rating: The Case of a Social Bank Financing Small Businesses
27 Pages Posted: 3 Sep 2012
Date Written: July 2012
Based on a unique hand-collected database of 389 loans obtained from a French social bank dealing with small businesses, this paper compares two predictive models of future default events: the first relies on soft information (SI model), the second on hard information (HI model). The results indicate that the SI model outperforms the HI model in terms of forecast quality and goodness of fit. In so doing, this paper provides further empirical evidence that, when they serve small businesses, small or decentralized banks have a greater ability to collect and act on soft information. This empirical conclusion conveys practical implication for social banks’ internal credit rating procedures, especially in their calibration of capital requirements.
Keywords: credit rating, debt default, small business lending, relationship lending, social banking
JEL Classification: G21, M21
Suggested Citation: Suggested Citation