SSE/EFI Working Paper Series in Economics and Finance
Bank Lending Policy, Credit Scoring and Value at Risk
() and Kasper Roszbach
Abstract: In this paper we apply a bivariate probit model to
investigate the implications of bank lending policy. In the first equation
we model the bank´s decision to grant a loan, in the second the probability
of default. We confirm that banks provide loans in a way that is not
consistent with default risk minimization. The lending policy must thus
either be inefficient or be the result of some other type of optimizing
behavior than expected profit maximization. Value at Risk, being a value
weighted sum of individual risks, provides a more adequate measure of
monetary losses on a portfolio of loans than default risk. We derive a
Value at Risk measure for the sample portfolio of loans and show how
analyzing this can enable financial institutions to evaluate alternative
lending policies on the basis of their implied credit risk and loss rate,
and make lending rates consistent with the implied Value at Risk.
Keywords: Banks; lending policy; credit scoring; Value at Risk; bivariate; (follow links to similar papers)
JEL-Codes: C35; D61; D81; G21; G33; (follow links to similar papers)
25 pages, September 29, 1998
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- Publication Data:
- Published in Journal of Banking & Finance, 2003, pages 615-633.
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