Does credit scoring improve the selection of borrowers and credit quality?

Giorgio Albareto (), Roberto Felici () and Enrico Sette
Additional contact information
Roberto Felici: Bank of Italy

No 1090, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper studies the effect of credit scoring by banks on bank lending to small businesses by addressing the following questions: does credit scoring increase or decrease the propensity of banks to grant credit? Does it improve the selection of borrowers? Does credit scoring improve or reduce the likelihood that a borrower defaults on its loan? We answer these questions using a unique dataset that collects data from both a targeted survey on credit scoring models and the Central Credit Register. We rely on instrumental variables to control for the potential endogeneity of credit scoring. We find that credit scoring does not change the propensity of banks to grant loans to the generality of borrowers but helps them select borrowers. We also find that credit scoring reduces the likelihood that a borrower defaults, in particular for smaller borrowers and for banks that declare to use credit scoring mainly as a tool to monitor borrowers. These results are homogeneous across bank characteristics such as size, capital, and profitability. Overall our results suggest that credit scoring has a positive effect on the selection of borrowers and on credit performance.

Keywords: credit scoring; credit supply; bank risk-taking; loan defaults (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-pay and nep-ure
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 090/en_tema_1090.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1090_16

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().