Banks' risk assessment of Swedish SMEs

Abstract

Building on the literatures on asymmetric information and risk taking, this paper applies conjoint experiments to investigate lending officers' probabilities of supporting credit to established or existing SMEs. Using a sample of 114 Swedish lending officers, we test hypotheses concerning how information on the borrower's ability to repay the loan; alignment of risk preferences; and risk sharing affect their willingness to grant credit. Results suggest that features that reduce the risk to the bank and shift the risk to the borrower have the largest impact. The paper highlights the interaction between factors that influence the credit decision. Implications for SMEs, banks and research are discussed.

Keywords:

• bank lending
• bank loans
• commercial lending
• SMEs
• Swedish SMEs
• Swedish banking system
• credit risk
• credit risk assessment
• risk managing
• risk management
• decision making
• credit decision process
• credit evaluation process
• conjoint experiment

Acknowledgement

The authors would like to thank Johan Wiklund for his valuable comments on an earlier version of this paper.