Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82435
Authors: 
Roszbach, Kasper
Year of Publication: 
2003
Series/Report no.: 
Sveriges Riksbank Working Paper Series 154
Abstract: 
To evaluate loan applicants, banks increasingly use credit scoring models. The objective of such models typically is to minimize default rates or the number of incorrectly classified loans. Thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default. In this paper a bivariate Tobit model with a variable censoring threshold and sample selection effects is estimated for (1) the decision to provide a loan or not and (2) the survival of granted loans. The model proves to be an effective tool to separate applicants with short survival times from those with long survivals. The bank’s loan provision process is shown to be ineffcient: loans are granted in a way that conflicts with both default risk minimization and survival time maximization. There is thus no trade-off between higher default risk and higher return in the lending policy.
Subjects: 
Banks
Lending policy
Credit scoring
Survival
Loans
JEL: 
C34
C35
D61
D81
G21
Document Type: 
Working Paper

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