Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures

Abstract

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.

Do FinTech Mortgage Lenders Fill the Credit Gap? Evidence from Natural Disasters

“…To avoid legal liabilities for riskier loans (e.g., costs of failure to meet the government-sponsored enterprises' (GSEs) representation and warranty conditions), traditional lenders may introduce credit overlays in the form of stricter credit standards. In line with this conjecture, Bedayo, Jiménez, Peydró, and Sánchez (2020) find that traditional banks expedite loan approval and origination during boom periods, but delay them during times of high volatility. In contrast, FinTech lenders may configure algorithms to identify creditworthy borrowers without tightening underwriting standards.…”