Better safe than sorry: defensive loan assessment behaviour in a changing bank environment

Abstract

Lending officers (LOs) assess loan applications under conditions characterized by shifts in economic climate, wavering public credibility for banks and greater industry regulation. This paper examines the extent to which, in such an economic environment, the LOs' assessment of commercial loan applications may be defensive, and, if so, which mechanisms that may trigger defensive loan assessment behaviour among LOs. Using data from interviews with 76 LOs in one major Swedish commercial bank and a focus group session, our findings suggest that in the economic environment studied, LOs tend to show a defensive approach to loan assessment with the intent to avoid risk and blame. This behaviour assumes different forms, including; avoiding change, playing safe, over-conforming, depersonalizing and using information symbolically. Triggering mechanisms reside on environmental, bank-and individual levels of analysis. Overall, this study contributes to the literature by demonstrating triggering mechanisms, intentions among LOs and forms of defensive loan assessment behaviour.

Female and male risk aversion

“…In the current banking environment, when banks have increasingly introduced standardised assessments and decision procedures in order to conform to regulatory requirements (Wilson et al, 2010), recent findings show that such processes may promote less risk-taking among LOs (Nilsson & Öhman, 2012). Our findings indicate that these processes may influence female LOs more than male LOs.…”

“…This responsibility is delegated to the LOs (Fletcher, 1995) who, among other things, wish to avoid Type I and Type II errors in assessing such relationships (Nilsson & Öhman, 2012). A Type I error is the rejection of a loan application as the result of misclassifying the borrower as uncreditworthy.…”

“…At the same time, branch offices have become more responsible for assessing potential and current borrowers using standardised procedures. These initiatives, which have influenced how LOs assess SME loan applications, have resulted in defensive behaviour by LOs (Nilsson & Öhman, 2012). …”

“…Longitudinal studies of female and male LOs' risk aversion could be fruitful, especially, as Nilsson and Öhman (2012) suggest, when changes in banking environments influence LOs' practices.…”

Microloan Constraints Imposed by Commercial Bank Branches in the South and West Sulawesi Province

“…The constraints faced by micro business applicants also faced from loan officer perspectives. Since loan officers are afraid to be blamed for a mistake in distributing loan to micro business (Nilsson and Ohman, 2011), their loan supply performance to micro business is suffering. It is particularly true when viewed from loan officer's characteristics like sex, age, and experiences.…”