Distance and Information Asymmetries in Lending Decisions

1
Distance and Information Asymmetries in Lending
Decisions

• by
• Sumit Agarwal and Robert Hauswald
• ( sons)
• Discussant
• Hans Degryse
• CentER Tilburg University, TILEC, K.U. Leuven
  and CESIfo
• TILEC-AFM Chair on Financial Market Regulation
• Conference on the Changing Geography of
  Banking, Ancona, September 2006

2
General Issue

• Does distance still matter?
• Petersen and Rajan (JF2002) US
• No, as distance between lender and borrower has
  quadrupled from 1970s to 90s
• Yes, as loan rate decreases in distance
• Degryse and Ongena (JF2005) Belgium
• Yes, distance between lender and borrowers did
  not increase substantially over from 1975-97
• Yes, as loan rate hinges on distance to lender
  and distance to competitor
• This paper US
• Loan pricing when controlling for score, no
• Loan volume and switching yes

3
General Issue evidence
4
General Issue why should distance matter?

• What does distance capture?
• Petersen and Rajan (JF2002) US
• No, as distance between lender and borrower has
  quadrupled from 1970s to 90s
• Yes as loan rate decreases in distance
• Degryse and Ongena (JF2005) Belgium
• Yes distance between lender and borrowers did
  not decrease dramatically
• Yes, as loan rate hinges on distance to lender
  and distance to competitor

5
This papers findings

• Loan rate determinants
• decreases in borrower-lender distance (DL) and
  increases in borrower-competitor distance (DC)
• Distance loses statistical significance when
  introducing the internal score of lender
• Interaction between score, and DL and DC shows
  that higher scored firms that are closer pay
  higher rates, hinting at asymmetric information
  being the driver
• Nice treatment of potential selection issues
• Decision to offer credit
• Decrease in DL and increase in DC
• Increase in score distance remains significant

6
This papers findings

• Switchers away from Bank
• Increase in DL and decrease in DC
• Interaction of score, and DC and DL suggest that
  higher scored firms are more likely to switch
  when DC is large, suggesting asymmetric
  information
• delinquency further away borrowers are more
  delinquent

7
CommentsSetting more inclined towards asymmetric
information?

• transportation costs vs. asymmetric
  information
• Degryse and Ongena (JF2005) Belgian sample 44
  borrowed from closest branch
• US borrowers do not turn to the closest branch
  but prefer to borrow from further away

8
CommentsSetting more inclined towards asymmetric
information?

• US versus Belgium absolute differences in
  distance
• US versus Belgium huge relative differences in
  DL versus DC
• gt how would results be in a restricted sample
  with similar absolute and/or relative
  differences

9
Comments asymmetric information?

• Inclusion of score in loan pricing model
• Removes statistical significance of distance as
  standard errors increase
• Magnitude of coefficients and economic
  significance, however, often remains
• Main Bank and Duration of Relationship (Months on
  Books)
• Relatively short duration median of 30 months
• both have a negative coefficient in loan rate
  regression gt asymmetric information would
  suggest a positive coefficient

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Comments Is it asymmetric information?

• Suppose branch managers know that the bank
  applies the following pricing model
• Loan rate f (Score)
• gt Branch managers reflect local market power in
  score gt borrowers where the branch manager
  asserts to enjoy a lot of market power get low
  score
• (see Ioannidou and Ongena (2006) competing bank
  credit scores get adjusted to allow loan officers
  to give borrowers lower rate to attract
  borrowers)
• gt distance and competitive setting gets
  reflected into score
• On p. 8-9 the authors mention our bank estimates
  that, on average, 20 to 30 of our banks scores
  consists of soft information
• Suggestion
• orthogonalize score to investigate the separate
  impact of distance and
• check in how far internal score differs from
  external score

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Comments Technology and potential selection

• Loans are from January 2002-April 2003, a recent
  period when new technologies may already be in
  place
• Is the bank only granting loans via its branches,
  or are also loans through other channels like
• Internet
• Online banking
• Other stores/shops, available
• gt i.e. do you cover all the loan applications
  and approvals of the bank?
• gt if not, potential selection issues
• Similar issues and question for rival banks?

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Minor Comments

• Do competing branches include own banks
  branches?
• Switching away from bank versus switching
  towards bank
• Should months on books and main bank and some
  other variables still play a role when internal
  score is good proxy of private information?

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Summary

• Interesting topic? Yes!
• Interesting paper? Yes!
• Do I recommend that you read it? Yes!
• Am I convinced? May be Not Yet