Loan quality, commercial loan review and loan officer contracting

Abstract

By the 1980s most banks had created a new department, commercial loan review, whose primary activity is to systematically assess the continuing quality of loans in the commercial loan portfolio. Conventional wisdom suggests that the purpose of commercial loan review is to serve as an early warning system for spotting credit deterioration. Evidence is presented in this paper that the true purpose of commercial loan review, however, is to address an agency problem between a bank and its commercial loan officers by monitoring their individual loan portfolios. The regulatory implications of these results are discussed. © 1989.