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

Abstract

A vast literature has emphasised that small banks are at a comparative advantage in lending to small businesses. In this paper, we show that, in addition to bank size, loan officers’ authority affects banks’ specialisation in small business lending. By using a unique dataset based on a survey of Italian banks, we find that loan officers’ authority has a key role in explaining bank specialisation in small business lending. In particular, banks that delegate more decision‐making power to their loan officers are more willing to lend to small firms than other banks. We use several proxies for measuring loan officers’ authority: their discretion in loan approval and in setting loan interest rates, the amount of money up to which they are allowed to lend autonomously, their turnover, their compensation schemes and the kind of information (soft vs. hard information) used both for screening and monitoring purposes.

Determinant Of Loan Supply Behavior : The Case Of Regional Development Banks In East Indonesia

“…This is also valid for the cost of personnel in which an increased expenditure on promotional costs could increase loan volume. This finding is consistent with Berg et al, (2012), Riley, (2005, Benvenuti et al, (2017), Inderst, (2007, and Agawal and Wang, 2009). It can be explained that an increase in personnel cost can drive up efforts to make more credit decisions, in particular, to loan officers.…”

“…This assumption is valid because researchers found that there is a strong relationship between salary and/or wage paid by a company and employee productivities (Riley, 2005;and Benvenuti, et al, 2017). Related to bank case, high salaries reflected in personnel cost will certainly have a positive impact on the employee motivation (Delery, & Doty, 1996;and Hermalin, & Wallace, 2001).…”