Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-04
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-04
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
Borrower-Lender Distance, Credit Scoring, and the Performance of Small Business Loans
Robert DeYoung*
Federal Deposit Insurance Corporation
Dennis Glennon*
Office of the Comptroller of the Currency
Peter Nigro
Bryant University
This version: March 2006
Abstract: We develop a theoretical model of decision-making under risk and uncertainty in which bank
lenders have both imperfect information about loan applications and imperfect ability to make decisions
based on that information. We test the loan-default implications of the model for a large random sample
of small business loans made by U.S. banks between 1984 and 2001 under the SBA 7(a) loan program.
As predicted by our model, both borrower-lender di stance and credit-scoring contribute to greater loan
defaults; the former finding suggests that distance interferes with information collection and monitoring,
while the latter finding implies production efficien cies that encourage credit-scoring lenders to make
riskier loans at the margin. However, we also find that credit-scoring dampens the harmful effects of
distance, consistent with the conjecture that information generated by credit scoring models improves the
ability of lenders to assess and price default risk.
JEL Codes: D81, G21, G28.
Key words: borrower-lender distance, credit scoring, small business loans.
* The views expressed here are those of the authors and do not necessarily reflect the views of the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, or the U.S. Treasury Department. The authors
are especially grateful to Dan McMillen for sharing his time and geographic mapping expertise, and to Scott Frame
for graciously providing data and expertise on credit-scoring. We also thank Allen Berger, Elena Carletti, Ed Kane,
Stefano Lovo, Robert Marquez, Richard Nelson, Evren Örs, Tony Saunders, and Chiwon Yom for comments that
have improved our work. DeYoung is the corresponding author: Associate Director, Division of Insurance and
Research, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, email:
rdeyoung@fdic.gov.
Robert DeYoung*
Federal Deposit Insurance Corporation
Dennis Glennon*
Office of the Comptroller of the Currency
Peter Nigro
Bryant University
This version: March 2006
Abstract: We develop a theoretical model of decision-making under risk and uncertainty in which bank
lenders have both imperfect information about loan applications and imperfect ability to make decisions
based on that information. We test the loan-default implications of the model for a large random sample
of small business loans made by U.S. banks between 1984 and 2001 under the SBA 7(a) loan program.
As predicted by our model, both borrower-lender di stance and credit-scoring contribute to greater loan
defaults; the former finding suggests that distance interferes with information collection and monitoring,
while the latter finding implies production efficien cies that encourage credit-scoring lenders to make
riskier loans at the margin. However, we also find that credit-scoring dampens the harmful effects of
distance, consistent with the conjecture that information generated by credit scoring models improves the
ability of lenders to assess and price default risk.
JEL Codes: D81, G21, G28.
Key words: borrower-lender distance, credit scoring, small business loans.
* The views expressed here are those of the authors and do not necessarily reflect the views of the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, or the U.S. Treasury Department. The authors
are especially grateful to Dan McMillen for sharing his time and geographic mapping expertise, and to Scott Frame
for graciously providing data and expertise on credit-scoring. We also thank Allen Berger, Elena Carletti, Ed Kane,
Stefano Lovo, Robert Marquez, Richard Nelson, Evren Örs, Tony Saunders, and Chiwon Yom for comments that
have improved our work. DeYoung is the corresponding author: Associate Director, Division of Insurance and
Research, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, email:
rdeyoung@fdic.gov.