Credit Risk Management In Banks: Hard Information, Soft Information And Manipulation

The role of information's processing in bank intermediation is a crucial input. The bank has access to different types of information in order to manage risk through capital allocation for Value at Risk coverage. Hard information, contained in balance sheet data and produced with credit scoring, is quantitative and verifiable. Soft information, produced within a bank relationship, is qualitative and non verifiable, therefore manipulable, but produces more precise estimation of the debtor's quality. In this paper, the authors investigate the impact of the information's type on credit risk management in a principal-agent framework with moral hazard with hidden information.