Review of Financial Studies Vol. 28 No. 12 2015
Playing the Devil's Advocate: The Causal Effect of Risk Management on Loan Quality
Abstract
This paper studies the dual role of risk managers and loan officers in a bank's organizational structure. Using 75,000 retail mortgage applications, I analyze the effect of risk-management involvement on loan default rates. 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 regression discontinuity design and a difference-in-differences 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 help to facilitate efficient screening decisions.
- DOI
- 10.1093/rfs/hhv040
- Volume
- 28
- Issue
- 12
- Pages
- 3367-3406
- Language
- en
- Sources
- openalex crossref