DP15445 Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures

Author(s):	Mikel Bedayo, Gabriel Jiménez, José Luis Peydró, Raquel Vegas
Publication Date:	November 2020
Keyword(s):	bank failures, Credit cycles, Defaults, Lending standards, loan origination time, screening
JEL(s):	E44, E51, G01, G21, G28
Programme Areas:	Financial Economics, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15445

We show that loan origination time is key for bank lending standards, cycles, defaults and failures. We exploit the credit register from Spain, with the time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition), capacity constraints, and borrower-lender information asymmetries are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, shorter precrisis origination time -more than other lending conditions- is associated with more bank-level failures in crises, consistent with lower screening.