The Repository of Soft Information within Bank Organizations

Abstract

We examine who is the repository of soft information within bank organizations. Inconsistent with the conventional view of loan officers as the sole repository, we find that branch managers have the most soft information. We also find the repository at a higher hierarchical level at smaller banks. Furthermore, our evidence suggests that branch managers themselves actively collect soft information, especially at smaller banks. These findings suggest the need for a more nuanced view beyond the conventional emphasis on loan officers, and call for studies on the equilibrium design of the collection, processing, and use of soft information within bank organizations.JEL codes: D2, D8, L2, G21

The Right to Decide and the Effective Control Over Small Business Lending Decisions: A Look into Loan Officers’ Real Authority

“…This is in line with the evidence obtained from Japan, as pointed out by Hattori et al . (), showing that branch managers produce most of the soft information collected by banks.…”

“…A recent paper by Hattori et al . () shows that branch loan officers produce the great part of soft information. Liberti and Mian () show that a greater hierarchical distance among those in charge of collecting soft information and those who are entitled to make lending decisions leads to lower production of soft information.…”

“…Other contributions show that compensation schemes linked to the amount of loans originated may lead to 'excessive lending' and to a lower quality of the portfolio (see, among the others, Agarwal and Ben-David, 2011;Heider and Inderst, 2012;Tzioumis and Gee, 2013). A recent paper by Hattori et al (2015) shows that branch loan officers produce the great part of soft information. Liberti and Mian (2009) show that a greater hierarchical distance among those in charge of collecting soft information and those who are entitled to make lending decisions leads to lower production of soft information.…”

Soft Information Production in Sme Lending

“…The issue of soft information production has also been explored in Uchida, Udell, and Yamori (2012), who focus on the central role of the loan officer in producing such information. Subsequent work by Hattori, Shintani, and Uchida (2015), though, shows that loan officers are not the sole sources of soft information: branch managers, especially those at smaller banks, may also collect soft information.…”

Hierarchy and Information

“…The finance literature measures the ('soft') information held by loan officers at lending institutions. The measures of soft information are either elicited from survey questions that ask directly the extent to which employees feel that they know borrower characteristics (Uchida et al, 2012;Hattori et al, 2015), the predictive power of internal risk ratings relative to 'hard' measurable characteristics of firms Hauswal, 2009, 2010; Brown et al, 2012; Qian et al 2015; Agarwal and Ben-David, 2018, Dal Bo et al, 2018), or measures of the effort exerted by relationship managers to learn about their clients (Liberti, 2018).…”