Journal Article

Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality

Tobias Berg

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 28, issue 12, pages 3367-3406
Published in print December 2015 | ISSN: 0893-9454
Published online July 2015 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhv040
Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality

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  • Banking
  • Analysis of Collective Decision-making
  • Corporate Governance

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This paper studies the dual role of risk managers and loan officers in a bank's organizational structure. Using 75,000 retail mortgage applications, I analyze the effect of risk-management involvement on loan default rates. The bank requires risk-management approval for loans that are considered risky based on hard information, using a sharp threshold that changes during the sample period. Using a regression discontinuity design and a difference-in-differences estimator, I am able to show that risk-management involvement reduces loan default rates by more than 50%. My findings suggest that a two-agent model can help to facilitate efficient screening decisions.

Keywords: G21; G32; D74

Journal Article.  15413 words.  Illustrated.

Subjects: Banking ; Analysis of Collective Decision-making ; Corporate Governance

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