The effect of credit scoring on small-business lending

This paper examines the effect of credit scoring on small-business lending for a sample of large U.S. banking organizations. We find that credit scoring is associated with an 8.4 percent increase in the portfolio share of small-business loans, or $4 billion per institution. However, we fail to uncover any specific attributes of bank small-business credit-scoring pro.-rams that lead to this increased lending. Overall, we conclude that credit scoring lowers information costs between borrowers and lenders, thereby reducing the value of traditional, local bank lending relationships.