Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures

Abstract

We show that loan origination time is key for bank lending standards, cycles, defaults and failures. We exploit the credit register from Spain, with the time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition), capacity constraints, and borrower-lender information asymmetries are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, shorter pre-crisis origination time —more than other lending conditions— is associated with more bank-level failures in crises, consistent with lower screening.