Screening Precision, Collateral, and Credit Reallocation

Department: Finance

Speaker: Manju Puri (Duke)

Room: T027

Screening Precision, Collateral, and Credit Reallocation

Abstract: 

Are screening precision and collateral substitutes in bank lending? Using confidential supervisory data, we exploit the ECB’s Targeted Review of Internal Models (TRIM) as a source of exogenous variation in screening precision. We show that supervisory inspections improve the accuracy of internal default risk estimates, which in turn reduces reliance on collateral. Lower collateral requirements reallocate credit toward young and service-sector firms with limited pledgeable assets, which subsequently expand borrowing and employment. We provide causal evidence that screening precision and collateral act as substitutes in lending contracts and that improvements in risk assessment reshape credit allocation and firm growth.