Advertisement

Hierarchy of bank loan approval and loan performance

  • Giorgio Calcagnini
  • Rebel Cole
  • Germana Giombini
  • Gloria Grandicelli
Article
  • 45 Downloads

Abstract

This paper analyzes data from a regional Italian bank to provide new evidence on the relationship between who, within a bank, approves a loan and the subsequent performance of the loan. The size of the bank and its pool of clients, who are primarily small- and medium-size firms, comprises characteristics of both relationship-based and transaction-based lending technologies. Our key finding is that the probability of loan default increases as the loan approval decision is made at higher levels of the lending-decision hierarchy. This evidence supports the primacy of relationship-lending technology relative to transaction-based lending technology.

Keywords

Lending technologies SMEs funding Soft and hard information Relationship lending 

JEL Classification

G21 G28 L25 O12 O16 

Notes

Acknowledgements

The authors thank Bob Chirinko, two anonymous referees, and participants at the International Conference on Small Businesses, Banks, Finance, Innovation and Growth held in Urbino, 12-13 October 2017, for helpful comments and suggestions. The usual disclaimers apply.

References

  1. Agarwal, S., & Hauswald, R. (2010). Distance and Private Information in Lending. Review of Financial Studies, 23: 2757–2788.CrossRefGoogle Scholar
  2. Alessandrini, P., Calcagnini, G. & Zazzaro, A. (2008). Asset restructuring strategies in bank acquisitions: does distance between dealing partners matter? Journal of Banking & Finance, 32(5): 699–713.CrossRefGoogle Scholar
  3. Alessandrini, P., Presbitero, A. F., & Zazzaro, A. (2009). Banks, distances and firms’ financing constraints. Review of Finance, 13(2): 261–307.CrossRefGoogle Scholar
  4. Badulescu, D. (2012). SMEs relationship banking: Length, loyalty, trust: Do SMEs get something in return? International Journal of Economics and Management Engineering, 6(6), 1038–1045.Google Scholar
  5. Bank of Italy. (2012). Relazione Annuale Sull’anno 2011. Roma: Bank of Italy.Google Scholar
  6. Bank of Italy. (2013). Relazione Annuale Sull’anno 2012. Roma: Bank of Italy.Google Scholar
  7. Bartoli, F., Ferri, G., Murro, P., & Rotondi, Z. (2013). SME financing and the choice of lending technology in Italy: complementarity or substitutability? Journal of Banking & Finance, 37(12): 5476–5485.CrossRefGoogle Scholar
  8. Berger, A. N., & Udell, G. F. (1992). Some evidence on the empirical significance of credit rationing. Journal of Political Economy, 100(5), 1047–1077.CrossRefGoogle Scholar
  9. Berger, A. N., & Udell, G. F. (2006). A more complete conceptual framework for SME finance. Journal of Banking & Finance, 30(11), 2945–2966.CrossRefGoogle Scholar
  10. Berlin, M., & Mester, L. J. (1999). Deposits and relationship lending. The Review of Financial Studies, 12(3): 579–607CrossRefGoogle Scholar
  11. Bolton, P., Freixas, X., Gambacorta, L., & Mistrulli, P. E. (2016). Relationship and transaction lending in a crisis. The Review of Financial Studies, 29(10): 2643–2676.CrossRefGoogle Scholar
  12. Boot, A. W. A. (2000). Relationship banking: What do we know? Journal of Financial Intermediation, 9(1), 7–25.CrossRefGoogle Scholar
  13. Boot, A. W. A., & Thakor, A. V. (1994). Moral hazard and secured lending in an infinitely repeated credit market game. International Economic Review, 20, 503–529.Google Scholar
  14. Brighi, P., Lucarelli, C., & Venturelli, V. (2017). The relative predictive strength of different lending technologies in funding smes. Mimeo.Google Scholar
  15. Calcagnini, G., Farabullini, F., & Giombini, G. (2014). The impact of guarantees on bank loan interest rates. Applied Financial Economics, 24, 397–412.CrossRefGoogle Scholar
  16. Calcagnini, G., Giombini, G., & Lenti, E. (2015). Gender differences in bank loan access. An Empirical Analysis. Italian Economic Journal, 1, 193–217.CrossRefGoogle Scholar
  17. Cole, R., Goldberg, L., & White, L. (2004). Cookie cutter vs. character: The micro structure of small business lending by large and small banks. Journal of Financial and Quantitative Analysis, 39, 227–250.CrossRefGoogle Scholar
  18. Cole, R., Wolken, J. D. (1995). Financial services used by small businesses: evidence from the 1993 National Survey of Small Business Finances, Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pp. 629–667.Google Scholar
  19. Gambacorta, L. (2016). Relationship and transaction lending: New evidence and perspectives. Emerging Markets Finance and Trade, 52(1), 70–75.CrossRefGoogle Scholar
  20. Gambacorta, L., van Rixtel, A. (2013). Structural bank regulation initiatives: Approaches and implications. In BIS Working Papers 412, Bank for International Settlements, Basel.Google Scholar
  21. Guida, R., & Sabato, V. (2017). Relationship lending and firms’ leverage: empirical evidence in Europe. European Financial Management, 23(4): 807–835.  https://doi.org/10.1111/eufm.12109 CrossRefGoogle Scholar
  22. Hernández-Cánovas, G., & Martínez-Solano, P. (2010). Relationship lending and SME financing in the continental European bank-based system. Small Business Economics, 34, 465–482.  https://doi.org/10.1007/s11187-008-9129-7.CrossRefGoogle Scholar
  23. ISTAT. (2009). Classificazione Delle Attività Economiche Ateco 2007. Metodi e Norme No. 40. Roma: ISTAT.Google Scholar
  24. Liberti, J. M., & Mian, A. R. (2009). Estimating the effect of hierarchies on information use. Review of Financial Studies, 22, 4057–4090.CrossRefGoogle Scholar
  25. Manove, M., Padilla, A. J., & Pagano, M. (2001). Collateral versus project screening: A model of lazy banks. RAND Journal of Economics, 32(4), 726–744.CrossRefGoogle Scholar
  26. Petersen, M. A., & Rajan, R. G. (1995). The effect of credit market competition on lending relationships. The Quarterly Journal of Economics, 110(2), 407–443.CrossRefGoogle Scholar
  27. Qian, J., Strahan, P. E., & Yang, Z. (2015). The impact of incentives and communication costs on information production and use: evidence from bank lending. The Journal of Finance, 70(4): 1457–1493.CrossRefGoogle Scholar
  28. Rajan, R. G. (1992). Insiders and outsiders: The choice between informed and arm’s-length debt. The Journal of Finance, 47(4), 1367–1400.CrossRefGoogle Scholar
  29. Sharpe, S. A. (1990). Asymmetric information, bank lending, and implicit contracts: A stylized model of customer relationships. The Journal of Finance, 45(4), 1069–1087.Google Scholar
  30. Uchida, H., Udell, G. F., & Yamori, N. (2006). SME financing and the choice of lending technology. Technical Report 06-E-025, RIETI Discussion Paper Series 06-E-025.Google Scholar
  31. Uchida, H., Udell, G. F., & Yamori, N. (2012). Loan officers and relationship lending to SMEs. Journal of Financial Intermediation, 21(1): 97–122CrossRefGoogle Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Università di Urbino Carlo BoUrbinoItaly
  2. 2.Mo.Fi.R.Politechnic University of MarcheAnconaItaly
  3. 3.Florida Atlantic UniversityBoca RatonUSA

Personalised recommendations