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.
|Place of Publication||Maastricht|
|Publisher||Maastricht University, Graduate School of Business and Economics|
|Publication status||Published - 1 Jan 2013|
|Series||GSBE Research Memoranda|
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