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
Date Revised: March 2021
Keyword(s): bank failures, Defaults, Lending standards over the cycle, 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 credit standards, defaults and failures over the cycle. We use the credit register from Spain, with the time of a loan application and its granting. When VIX is lower, banks shorten loan origination time, especially to less-capitalized firms. Bank moral hazard incentives (competition and capital) are crucial drivers. Moreover, shorter (loan-level) origination time implies higher ex-post defaults, especially for less-capitalized firms in areas with higher bank competition or when VIX is lower. Finally, shorter pre-crisis origination time involves more bank-level failures, even more than other lending conditions, consistent with lower screening.