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

Tobias Berg
2015 The Review of financial studies  
This paper studies the dual role of risk managers and loan officers in a bank's organizational structure. Using 75,000 retail mortgage applications at a major European bank from 2008-2011, I analyze the effect of risk management involvement in the loan granting process on loan default rates. In the period under study, 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
more » ... period. Using a regression discontinuity design and a difference-indifferences 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 facilitate efficient screening decisions. I wish to thank Viral
doi:10.1093/rfs/hhv040 fatcat:alrviefohvdmhc6kr2cnho3y2i