Does Credit Scoring Improve the Selection of Borrowers and Credit Quality?

47 Pages Posted: 9 Feb 2017

Date Written: October 27, 2016

Abstract

This paper studies the effect of credit scoring by banks on bank lending to small businesses by addressing the following questions: does credit scoring increase or decrease the propensity of banks to grant credit? Does it improve the selection of borrowers? Does credit scoring improve or reduce the likelihood that a borrower defaults on its loan? We answer these questions using a unique dataset that collects data from both a targeted survey on credit scoring models and the Central Credit Register. We rely on instrumental variables to control for the potential endogeneity of credit scoring. We find that credit scoring does not change the propensity of banks to grant loans to the generality of borrowers but helps them select borrowers. We also find that credit scoring reduces the likelihood that a borrower defaults, in particular for smaller borrowers and for banks that declare to use credit scoring mainly as a tool to monitor borrowers. These results are homogeneous across bank characteristics such as size, capital, and profitability. Overall our results suggest that credit scoring has a positive effect on the selection of borrowers and on credit performance.

Keywords: credit scoring, credit supply, bank risk-taking, loan defaults

JEL Classification: G21

Suggested Citation

Albareto, Giorgio and Felici, Roberto and Sette, Enrico, Does Credit Scoring Improve the Selection of Borrowers and Credit Quality? (October 27, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1090, Available at SSRN: https://ssrn.com/abstract=2914276 or http://dx.doi.org/10.2139/ssrn.2914276

Giorgio Albareto (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberto Felici

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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