Monitoring monitors

Inaugural lecture: Mr. prof.dr. K.F. Roszbach, 16.15 uur, Aula Academiegebouw, Broerstraat 5, Groningen

Title: Monitoring monitors

Chair: Banking and Finance

Faculty: Economics and Business

Many economists have long considered banks to be efficient intermediaries of finance because they are better able to take absorb risks through diversification and generate scale economies in monitoring borrowers while collecting and processing information. These efficiencies are the core of a broad belief that it is efficient for households and businesses to deposit their money in banks and delegate the monitoring of investors to their bank. It is also a received wisdom that banks thus ought to have superior information on their borrowers and that bank supervisors do best by relying on banks’ internal risk measurements when evaluating bank risk.

More recently, researchers have argued that the quality of monitoring by banks as well as the intensity by which banks monitor borrowers varies as a result of a range of conditions, such as the business cycle, the number of banks that are lending to a firm, the presence of collateral, and the extent to which detailed information is available and shared with other banks.

This raises several important questions. Are households and businesses as well as supervisors right by assuming that banks are indeed superior monitors? How can we find out if banks are adequately evaluating the riskiness of their borrowers? Is there scope for banks to improve their risk analysis?

In his inaugural address Kasper Roszbach argues that there is evidence that some banks may have scope for further improvement of their monitoring technology. He also illustrates why commonly used techniques for evaluating the riskiness of borrowers can give a misleading impression of the actual risk in a bank’s portfolio. In his address Kasper Roszbach also discusses a method that enables bank supervisors to evaluate the monitoring quality of the banks they supervise in a systematic way, i.e. for monitoring the monitors.