Credit and Information in Universal Banking - a Clinical Study

Abstract

The internal aspects of bank lending, information production and interaction between debtor and bank lending officers, are still a black box to banking theory. To achieve some empirical insight into these aspects of financial intermediation, the credit files of six lending relationships between a German universal bank and medium sized firms are analysed. If no problems occur in these lending relationships, bank monitoring is based mainly on cheap, retrospective and internal data. In case of distress, more expensive, prospective and external information is used. However, in a case where the firm went bankrupt, information production almost stopped about one year before bankruptcy. In all cases, most of the data the bank uses is not publicly available, which supports the concept of banks as delegated monitors with an informational advantage over capital markets. Likewise signaling and monitoring behaviour of the debtor can be observed, indicating the banks also act as delegated contractors. Bank lending officers seem to react to these actions accordingly. Thus, they seem to receive information about their debtors not only from monitoring, but also from the debtors behaviour. The results must be seen under the precaution that they stem from a clinical, non-representative study. Nevertheless, the paper provides some empirical evidence on the potential relevance of theoretical concepts of bank lending, which is to a great degree still lacking in the economic literature.