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Hidden Gems and Borrowers with Dirty Secrets
Report

Hidden Gems and Borrowers with Dirty Secrets

Investment in Soft Information, Borrower Self-Selection and Competition

ECB, 2013

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

A bank’s success hinges on figuring out whom to lend to and at what rate. While transaction banks make this judgment using hard numbers, relationship banks get to know their clients and their businesses, and accept soft data that could conceal either “hidden gems” or “dirty little secrets.” Reint Gropp, Christian Gruendl and Andre Guettler examine which strategy pays off. getAbstract recommends their fresh analysis to borrowers seeking the best terms, bank executives wishing to optimize lending, and regulators and politicians concerned with small business growth.

Take-Aways

  • “Soft information” is the proprietary information a bank builds up about its clients through relationship banking.
  • Relationship banks, which tend to be small, rely on soft information to inform their risk assessments. Transaction banks, apt to be larger, invest less time and money in collecting soft information about their borrowers.
  • Risky borrowers with positive soft information “self-select” to use relationship banks, while those with negative soft information choose transaction banks.

About the Authors

Reint Gropp holds the chair of sustainable banking and finance at Goethe University in Frankfurt. Christian Gruendl and Andre Guettler work at the finance department at the European Business School.