Patrick Behr

Credit Risk Assessment and Relationship Lending: An Empirical Analysis of German Small and Medium-Sized Enterprises

We estimate a logit scoring model for the prediction of the probability of default by German small and medium‐sized enterprises (SMEs) using a unique data set on SME loans in Germany. Our scoring model helps SMEs to gain knowledge about their default risk, which can be used to approximate their risk adequate cost of debt. This knowledge is likely to lead to a detection of hold‐up problems that German SMEs might be confronted with in their bank relationships. Furthermore, it allows them to monitor their bank’s pricing behavior and it reduces information asymmetries between lenders and borrowers. Finally, it can influence their future financing decisions toward capital market‐based financing.

On Portfolio Optimization: Imposing the Right Constraints

We reassess the recent finding that no established portfolio strategy outperforms the naively diversified portfolio, 1/N, by developing a constrained minimum-variance portfolio strategy on a shrinkage theory based framework. Our results show that our constrained minimum-variance portfolio yields significantly lower out-of-sample variances than many established minimum-variance portfolio strategies. Further, we observe that our portfolio strategy achieves higher Sharpe ratios than 1/N, amounting to an average Sharpe ratio increase of 32.5% across our six empirical datasets. We find that our constrained minimum-variance strategy is the only strategy that achieves the goal of improving the Sharpe ratio of 1/N consistently and significantly. At the same time, our developed portfolio strategy achieves a comparatively low turnover and exhibits no excessive short interest.

Sex and Credit: Is There a Gender Bias in Lending?

This paper examines the effects of group identity in the credit market. Exploiting the quasirandom assignment of first-time borrowers to loan officers of a large Albanian lender, we test for own-gender bias in the loan officer-borrower match. We find that borrowers pay on average 29 basis points higher interest rates when paired with a loan officer of the other sex. The results indicate the presence of a taste-based rather than a statistical bias, as borrowers’ likelihood of going into arrears is independent of loan officer gender. Ending up with an opposite-sex loan officer also affects demand for credit, with borrowers being 11.5 percent less likely to return for a second loan. The bias is more pronounced when the social distance, as proxied by difference in age between the loan officer and the borrower, increases and when financial market competition declines. This is consistent with theories that predict a tastebased bias to be stronger when the psychological costs of being biased are lower and the discretion in setting interest rates is higher. Taken together, the findings suggest that owngender preferences can have substantial welfare effects.

Did Government Regulations Lead to Inflated Credit Ratings

SEC regulations in 1975 gave select ratings agencies increased market power by increasing barriers to entry and reliance on ratings for regulations. We test whether these regulations led to lower ratings quality. We find that defaults and negative financial changes are more likely for firms given the same rating if the rating was assigned after the SEC action compared to before. Further, firms initially rated Baa post-regulations are 19% more likely to be negatively downgraded to speculative grade than firms rated Baa pre-regulations. These results indicate that the market power derived from the SEC led to ratings inflation. JEL Classification: G18, G24, G28, G32Securities and Exchange Commission (SEC) regulations in 1975 gave select rating agencies increased market power by increasing both barriers to entry and the reliance on ratings for regulations. We test whether these regulations led to ratings inflation. We find that defaults and negative financial changes are more likely for firms given the same rating if the rating was assigned after the SEC action. Furthermore, firms initially rated Baa in the post-regulation period are 19% more likely to be negatively downgraded to speculative grade than firms rated Baa in the pre-regulation period. These results indicate that the market power derived from the SEC led to ratings inflation. This paper was accepted by Amit Seru, finance.

Cyclicality of SME lending and government involvement in banks

Recent regulatory efforts aim at lowering the cyclicality of bank lending because of its potentially detrimental effects on financial stability and the real economy. We investigate the cyclicality of SME lending of local banks with versus without a public mandate, controlling for location, size, loan maturity, capitalization, funding structure, liquidity, profitability, and credit demand-side factors. The public mandate is set by local governments and stipulates a sustainable provision of financial services to local customers and a deviation from strict profit maximization. We find that banks with a public mandate are 25% less cyclical than other local banks. The result is credit supply-side driven and especially strong for public mandate banks with high liquidity and stable deposit funding. Our findings have implications for the bank structure, financial stability and the finance-growth nexus in a local context.

The German Banking System

This chapter provides a comprehensive overview of the German banking system. In the sections “Structural Features of the German Banking System” and “The Structure of the German Banking System”, we will give a detailed description of the current structure of the German banking system and its recent developments. The consequences of the financial crisis of 2007–8 for the German banking system and other challenges facing German banks are discussed in the section “Challenges Facing German Banks”. In the section “German Banking in an International Comparison”, we provide a brief comparison of the German banking system with other European banking systems to point out the uniqueness of the German banking system. The strong role and involvement of the government in German banking is subject to ongoing debate. We elaborate more on this and discuss the findings of recent empirical research on the German banking system in the section “Results of Recent Research on the German Banking System”. Finally, “Concluding Remarks” draws the chapter to a close and offers an outlook for the future.

Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract

In this paper we investigate the implications of providing loan officers with a compensation structure that rewards loan volume and penalizes poor performance versus a fixed wage unrelated to performance. We study detailed transaction information for more than 45,000 loans issued by 240 loan officers of a large commercial bank in Europe. We examine the three main activities that loan officers perform: monitoring, originating, and screening. We find that when the performance of their portfolio deteriorates, loan officers increase their effort to monitor existing borrowers, reduce loan origination, and approve a higher fraction of loan applications. These loans, however, are of above-average quality. Consistent with the theoretical literature on multitasking in incomplete contracts, we show that loan officers neglect activities that are not directly rewarded under the contract, but are in the interest of the bank. In addition, while the response by loan officers constitutes a rational response to a time allocation problem, their reaction to incentives appears myopic in other dimensions.

Individual versus Village Lending: Evidence from Montenegro

This paper analyzes differences in loan performance across two Montenegrin microfinance institutions with different lending techniques using a sample of individuals borrowing from both institutions. We make use of administrative data from both institutions over the period 2004-2013. While one institution relies on village associations for screening and monitoring of borrowers, the other institution uses the individual liability approach. We find that the likelihood to go into arrears is higher for the institution with a strictly individual lending technique, while the likelihood of going into arrears over 30 days is higher for the institution working with village associations. These results are robust to a variety of additional tests, including different definitions of arrears and subsamples. Our findings suggest that the institution using an individual lending technique provides certain flexibility to its clients, while the village-based microfinance institution might face more strategic default behavior. We provide evidence that once a borrower is in arrears, (s)he is more likely to stay in arrears for more than 30 days in branches with a higher share of borrowers in arrears and in the village-based lender. Our findings provide evidence that a village- or group-based lending technique is not necessarily superior to the individual lending technique in terms of loan performance.

On the Required Regulatory Support for Credit Derivative Markets

This valuable book discusses in detail, through a blend of theory and empirical research, the processes of innovation and the diffusion of new financial instruments.

Dritter Schritt zum Controllingsystem: Informationsmanagement und Kommunikation

„Es wird eine neue Ara der Kommunikation geben, in der die Diskussion zwischen Banken und Kunden unternehmerischer wird und sich nicht mehr in qualenden Detailfragen verliert.“66