Loan Officer Specialization and Credit Defaults

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