Academic journal article Journal of Small Business Management

Loan Officer Turnover and Credit Availability for Small Firms

Academic journal article Journal of Small Business Management

Loan Officer Turnover and Credit Availability for Small Firms

Article excerpt

This paper presents empirical evidence on the role loan officers play in facilitating small firm access to commercial bank loans. If loan officers use soft information (for example, assessments of character, information from customers and suppliers) to make lending decisions that would not otherwise be made on the basis of hard information (for example, tax returns or financial statements), then, frequent turnover in loan officers should be associated with an adverse effect on credit availability. This relationship is confirmed empirically using survey data of U.S. small firms in 1995 and 2001, where loan officer turnover is positively related to the turndown rate on the most recent loan application. Although loan officer turnover could be influenced by the turndown rate (for example, an owner changes banks and gets a new loan officer as a result of a recent turndown), its negative effect on credit availability persists under several different tests.


Small firm credit decisions are often made on the basis of hard information that is easily quantifiable such as audited financial statements, credit bureau information, or owner tax returns, and nonfinancial or soft information, which is more difficult to quantify, such as assessments of the owner's character. The loan officer (or relationship manager) plays a key role in producing and interpreting soft information that should provide a more complete profile for credit decisions, especially for banks that rely on a relationship banking strategy (Berger and Udell 2002). Without the soft information, many small firms could be denied credit because of their limited operating history or incomplete financial statements, especially for proprietorships or family-owned firms. In other words, the numbers or hard information may not tell the entire story. Though there is some empirical evidence that nonfinancial information affects small firm bank credit availability (Cole, Goldberg, and White 2004), the role of the loan officer in using soft information in small firm credit decisions is largely unexplored.

The paper provides the first direct empirical evidence that shows an association between the role of loan officers and credit availability for small firms. Increased loan officer turnover could lead to decreased credit availability for small firms if the value of soft information in the credit decision is dependent upon the loan officer's interpretation. Small firm owners need to understand this relationship, especially in the United States where a consolidating banking industry has resulted in fewer community banks serving small firms, and an increased reliance by larger banks on credit-scoring techniques for small business loans--the antithesis of relationship banking.

Firm-level data are used from the 1995 and 2001 Credit, Banks, and Small Business Surveys of U.S. small businesses that are members of the National Federation of Independent Business (NFIB) to test what role loan officers have on small firm credit availability. One of the survey variables, a report of account manager turnover, is used as a proxy for soft information production. Account manager turnover and proxies for hard information (for example, length of banking relationship), along with control variable for firm risk characteristics (size, years in business) and market structure (merger activity, market size, and deposit concentration), are used to explain the most recent loan application outcome at commercial banks.

Relationship Lending: Theory and Evidence

Relationship lending in the literature generally refers to the process of collecting private, customer-specific information on potential borrowers, and then using it to engage in profitable banking activities (for example, Boot 2000). Private information can include any information about the borrower not in the public domain and includes both "hard" information (for example, tax returns, customer lists) and "soft" information (for example, supplier comments about the borrower). …

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