This paper analyzes the importance of discretion in bank lending decisions. We use a unique dataset of more than 1 million loan applications to customers of German savings banks and can observe accept and reject decisions as well as loan performance. We document that discretion is widespread and...

Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using...