What Do a Million Observations Have to Say About Loan Defaults? Opening the Black Box of Relationships

Using a unique dataset of more than 1 million loans made by 296 German banks, we evaluate the impact of many aspects of customer–bank relationships on loan default rates. Banks need historical data about their borrowers to establish a baseline against which new client-related information can be evaluated and assemble this historical information through relationships of different forms (transaction accounts, savings accounts, prior loans), scope (credit and debit cards, credit lines), and depth (relationship length, utilization of credit line, money invested in savings account). We find that banks with relationship-specific information act differently compared with banks that do not have this information both in screening and monitoring borrowers which eventually reduces loan defaults.

Steffen, Sascha, Manju Puri and Jörg Rocholl (2016), What Do a Million Observations Have to Say About Loan Defaults? Opening the Black Box of Relationships,