Attention Allocation and Credit Quality

48 Pages Posted: 15 Mar 2017  

Mike Mariathasan

KU Leuven- Faculty of Economics & Business

Sergey Zhuk

University of Vienna

Date Written: July 5, 2018

Abstract

We develop a model of attention allocation to analyse the interaction between credit quality and aggregate economic conditions. Capacity-constrained lenders trade off the number of processed funding applications with the precision of their underwriting process. As the quality of the applicant pool improves, the marginal return to scrutiny decreases. Lenders optimally process more applications but approved loans become riskier ex-ante and generate lower expected returns. The model simultaneously explains the deterioration of credit quality during market booms, tighter standards during recessions, and the counter-cyclical duration of banks’ loan reviews.

Keywords: credit cycle, lending standards, loan officers, attention allocation, capacity constraints, financial accelerators

JEL Classification: G20, G21, E51

Suggested Citation

Mariathasan, Mike and Zhuk, Sergey, Attention Allocation and Credit Quality (July 5, 2018). Available at SSRN: https://ssrn.com/abstract=2933476 or http://dx.doi.org/10.2139/ssrn.2933476

Mike Mariathasan

KU Leuven- Faculty of Economics & Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Sergey Zhuk (Contact Author)

University of Vienna ( email )

Universitätsstrasse 7
Vienna, Vienna 1010
Austria

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