Banks' risk taking in credit decisions: influences of loan officers' personality traits and financial risk preference versus bank-contextual factors

Abstract

PurposeThis paper aims to investigate whether loan officers' risk taking in credit decisions are associated with their personal financial risk preference and personality traits or solely with bank-contextual and loan-relevant factors.Design/methodology/approachAn online survey administered in six large Swedish banks to 163 loan officers responsible for assessing credit risk and approval of loan applications. The loan officers rated their likelihood of approving fictitious loan applications from business companies.FindingsThe loan officers' credit risk taking is associated with bank-contextual factors, directly with perceived organizational credit risk norms and indirectly with self-confidence in assessing credit risks through attitude to credit risk taking. A direct association is also found with personal financial risk preference but not with personality traits.Research limitations/implicationsIncreased awareness of that loan officers' personal financial risk preference is associated with their credit risk taking in loan decisions but that the banks' risk policy has a stronger association. Banks' managements and boards should therefore assure that their credit risk policy is implemented, followed and being aligned with their performance incentives.Practical implicationsIncreased awareness of that loan officers' credit risk taking is associated with personal financial risk preference but more strongly with the banks' risk policy that motivate banks' managements and boards to assure that their credit risk policy is implemented, followed and being aligned with their performance incentives.Originality/valueThe first study which directly compare the associations of loan officers' risk taking in credit approvals with personal risk preference and personality traits versus bank-contextual factors and loan-relevant information.

Personality, Risk and Financial Planning: A Consigned Credit Analysis

“…It identifies who needs to act on them (for example, poverty reduction, unnecessary labeling of financial support as a loan, and financial education for children). Jansson, et al (2023), analyze the banks' risk-taking in credit decisions and the influences of loan officers' personality traits and financial risk preferences. The authors find that the loan officers' credit risk-taking is associated with bankcontextual factors, directly with perceived organizational credit risk norms, and indirectly with self-confidence in assessing credit risk through attitude to credit risktaking.…”