Regulatory pressure, allocating decision rights, and the use of soft information

63 Pages Posted: 16 Aug 2016 Last revised: 22 Oct 2020

See all articles by Jan Bouwens

Jan Bouwens

Amsterdam Business School

Ties de Kok

University of Washington - Michael G. Foster School of Business

Date Written: October 21, 2020

Abstract

This paper examines how the centralization of loan decisions affects decision making in a bank. To that end, we combine field data with a lab experiment to study how loan officers change their effort to collect and share soft information about small to medium-sized applicants when their decision rights are taken away under regulatory pressure. Our field study exploits a quasi-natural experiment at a large European bank who reallocated the loan officers' decision rights to the risk department following regulatory pressure to improve SME lending frictions and risk controls. Using a difference-in-differences design we find that the use of soft information in SME loan decisions improves following the reallocation of decision rights. Additional tests show that this result is driven by a change in behavior of the incumbent loan officers and that the interest rate adjustments become more predictive of future loan performance, which is consistent with an improvement in loan evaluation quality. Furthermore, our lab experiment provides empirical evidence consistent with these improvements being driven by the presence of regulatory pressure justifying the need for internal change. Our study informs financial institutions, regulators, and academics about the importance of considering contextual characteristics, in our case the existence of regulatory pressure, when evaluating the outcomes of internal organizational change.

Keywords: soft information; decision rights; risk management; SME financing; regulation

JEL Classification: G21, G32, D82, M41

Suggested Citation

Bouwens, Jan and de Kok, Ties, Regulatory pressure, allocating decision rights, and the use of soft information (October 21, 2020). Available at SSRN: https://ssrn.com/abstract=2823253 or http://dx.doi.org/10.2139/ssrn.2823253

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Ties De Kok (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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