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Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality

The Review of Financial Studies (Forthcoming)

55 Pages Posted: 11 May 2014 Last revised: 30 Jun 2015

Tobias Berg

Frankfurt School of Finance & Management

Date Written: June 24, 2014

Abstract

This paper studies the dual role of risk managers and loan officers in a bank's organizational structure. Using 75,000 retail mortgage applications, I analyze the effect of risk management involvement on loan default rates. The bank requires risk management approval for loans that are considered risky based on hard information, using a sharp threshold that changes during the sample period. Using a regression discontinuity design and a difference-in-differences estimator, I am able to show that risk management involvement reduces loan default rates by more than 50%. My findings suggest that a two-agent model can help to facilitate efficient screening decisions.

Keywords: risk management, loan officer incentives, organizational design

JEL Classification: G21, G32, D74

Suggested Citation

Berg, Tobias, Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality (June 24, 2014). The Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2435158 or http://dx.doi.org/10.2139/ssrn.2435158

Tobias Berg (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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