A micro-econometric analysis of the banks' loan rejection rates and the creditworthiness of the banks' corporate customers
Working paper no 81, 2012
We offer micro-econometric evidence on the relationship between the banks' loan rejection rates and the creditworthiness of the banks' corporate customers in 2007 and 2009/10 based on a unique Danish firm- and bank-level dataset. We find lower acceptance rates for applications for bank loans from firms with weak economic performance than for firms with strong economic performance. This was the case both prior to but especially during the financial crisis in 2009/10, where firms with higher profit ratios, solvency ratios and liquidity ratios had a significantly higher probability of having their loan application accepted than firms with poor economic performance. The banks tightened their credit standards during the financial crisis. However, banks with low capital adequacy ratios during the crisis did not have lower loan acceptance rates than banks with high capital adequacy ratios. This indicates that it has not been the banks' own capitalisation, which has been the decisive factor for the decline in the banks' loan acceptance rates during the financial crisis but rather the deterioration of the credit quality of the banks' corporate customers, which made it necessary for prudent banks to tighten their credit standards.