Loan Officer Specialization and Credit Defaults

75 Pages Posted: 16 Nov 2018 Last revised: 19 Mar 2024

See all articles by Michael Goedde-Menke

Michael Goedde-Menke

University of Münster - Finance Center Münster

Peter-Hendrik Ingermann

University of Münster - Finance Center Münster

Date Written: December 22, 2023

Abstract

This paper shows that industry specialization of loan officers facilitates monitoring synergies and lowers credit default rates of small and medium-sized enterprises. We exploit a wave of early loan officer retirements as a quasi-natural experiment, in which the resulting borrower reallocations changed the industry specialization levels of the remaining loan officers. In a difference-in-differences analysis excluding all reallocated borrowers, we find that a negative shock to loan officer specialization increases default rates due to an inferior production of default risk information and excessive loan growth. A positive shock to loan officer specialization generates opposite effects. Our results suggest that loan officers can exploit industry specialization and related monitoring synergies to improve lending decisions and thereby contribute to lowering credit default rates in the bank’s borrower portfolio.

Keywords: Industry specialization; Credit default rates; Soft information production; Loan officers; Monitoring synergies

JEL Classification: G21; G33

Suggested Citation

Goedde-Menke, Michael and Ingermann, Peter-Hendrik, Loan Officer Specialization and Credit Defaults (December 22, 2023). Goedde-Menke, M., Ingermann, P.-H., 2024. Loan officer specialization and credit defaults. Journal of Banking & Finance 161, 107077. https://doi.org/10.1016/j.jbankfin.2023.107077, Available at SSRN: https://ssrn.com/abstract=3276248 or http://dx.doi.org/10.2139/ssrn.3276248

Michael Goedde-Menke (Contact Author)

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Peter-Hendrik Ingermann

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

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