Bank lending strategy, credit scoring and financial crises

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Abstract

Adverse selection inherent in the bank-borrower relationship typically intensifies during crises. This problem is expecially severe in emerging markets, characterized by weak institutions and banks with poorly developed monitoring and screening abilities. Exploiting a unique sample of Vietnamese loans, we show that by updating their credit scoring models banks can significantly improve their screening abilities. Our results suggest that a crisis fundamentally changes default patterns and that a model based on post-crisis data outperforms models based on pre-crisis data. We conclude that updating credit scoring models is a viable alternative to credit rationing for banks and, in combination with relationship lending, can lead to improved loan pricing, efficiency and profitability.
Original languageEnglish
Place of PublicationMaastricht
PublisherMaastricht University, Graduate School of Business and Economics
Publication statusPublished - 1 Jan 2013

Publication series

SeriesGSBE Research Memoranda
Number053

Cite this

Dinh, T. H. T., Kleimeier, S., & Straetmans, S. T. M. (2013). Bank lending strategy, credit scoring and financial crises. Maastricht University, Graduate School of Business and Economics. GSBE Research Memoranda, No. 053