Qualitative Research in Accounting & Management

Qualitative Research in Accounting & ManagementEmerald Article: Better safe than sorry: defensive loan assessment behaviour in a changing bank environmentAnders Nilsson, Peter Öhman

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To cite this document: Anders Nilsson, Peter Öhman, (2012),"Better safe than sorry: defensive loan assessment behaviour in a changing bank environment", Qualitative Research in Accounting & Management, Vol. 9 Iss: 2 pp. 146 - 167

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Better safe than sorry: defensiveloan assessment behaviour in achanging bank environment

Anders NilssonDepartment of Business Administration, Technology and Social Sciences,

Lulea University of Technology, Lulea, Sweden andDepartment of Social Sciences, Center for Research on Economic Relations,

Mid Sweden University, Sundsvall, Sweden, and

Peter OhmanDepartment of Social Sciences, Center for Research on Economic Relations,

Mid Sweden University, Sundsvall, Sweden

Abstract

Purpose – The purpose of this paper is to examine to what extent and in what forms loanapplications from small and medium-sized enterprises (SMEs) in a risk averse banking environmentcan be assessed defensively by lending officers (LOs). The paper also identifies triggering mechanismsbehind defensive SME loan assessment behaviour and its’ possible effects on the bank and the LOs.

Design/methodology/approach – The paper relies on a case study of a major Swedish commercialbank undergoing strategy and control system change during the recent financial crisis. The empiricalevidence was collected through interviews with 76 LOs in three branch offices and a focus groupinterview session.

Findings – In a risk averse banking environment, LOs can be prone to assessing SME loanapplications defensively to a noteworthy extent. Such defensiveness comes in different forms: denial ofloan applications, granting of loans with collateral or high interest rates, or granting of loans only toclients with most of their financial affairs in the bank. External and internal mechanisms jointlytrigger defensive loan assessment behaviour. The possible effects include fewer Type II errors andmore Type I errors for the bank, while LOs avoid change and blame.

Originality/value – Overall, this study contributes to the literature by revealing triggeringmechanisms, forms and effects related to the multifaceted construct of defensive loan assessmentbehaviour among LOs in a commercial bank, who handle applications from SMEs.

Keywords Banking, Defensive behaviour, Effects, Lending officers, Loan assessment,Triggering mechanisms, Sweden, Loans, Lending services

Paper type Research paper

1. IntroductionIn recent years, the management of risk has become a pressing matter on the agenda offinancial institutions. One reason is the global economic downturn and its origins in thefinancial industry (Arnold, 2009; Roberts and Jones, 2009). A second, albeit related,reason is the emphasis on risk management and financial safety margins in thebanking industry provided by the Basel Accords (Wahlstrom, 2009). Taken together,these contextual conditions beg the question whether the loan assessment behaviour ofbank lending officers (LOs) remains unchanged in comparison to the situation a fewyears ago (Mullineaux, 2009).

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Qualitative Research in Accounting& ManagementVol. 9 No. 2, 2012pp. 146-167q Emerald Group Publishing Limited1176-6093DOI 10.1108/11766091211240360

While there can be little doubt that risk is a key concept to take into considerationby LOs, some of the practices associated with a less risk-taking financial environmenthave been called into question in previous research. One notable example is Power(2004), who raises questions concerning the extent to which recent tendencies aredefensive reactions to a demanding environment. In turn, it has been claimed that suchreactions are based on a simplified view according to which risk assessment is strictlynumerical, with little or no need for professional judgement (Power, 2009) orsupplementary “soft” information (Chua, 1996). However, despite the importance ofthis matter, previous research offers little or no empirical evidence of defensive loanassessment behaviour among LOs.

The tendency towards greater attention to risk in the banking industry may affectLO loan assessment differently depending on the extent to which prudence and riskawareness already is part of the organisational management blueprints and the waysin which business is conducted (Mikes, 2009). Ideally, the control system in operationshould ensure a match between business strategy and loan assessment behaviour(Anthony, 1965; Berger and Udell, 2004). However, while risk control allows theavoidance of Type II errors (credit losses) (Dietsch and Petey, 2002), it remains difficultto measure Type I errors (denial of loans that would have been successfully repaid)(Deakins and Hussain, 1994a, b).

For the individual LO, the above scenario constitutes a complex territory in whichconsistent and professional loan application assessment is expected. From the point ofview of the applicant, defensiveness is likely to be especially problematic for small- andmedium-sized enterprises (SMEs) that are financially constrained and less likely thanlarge firms to have access to financing even during periods of economic prosperity(Beck and Demirguc-Kunt, 2006).

Thus, the present paper addresses three research questions:

RQ1. To Whom It May Concern: what extent can loan applications from SMEs in arisk-averse banking environment be assessed defensively by LOs?

RQ2. In what forms might such defensive loan assessment behaviour occur?

RQ3. Why might LOs assess SME loan applications defensively and what are thepossible effects on the bank and the LOs?

The empirical evidence presented in this paper derives from a study of LOs in branchoffices of a major Swedish commercial bank. It should be noted that the recent financialcrisis has had a negative impact on Swedish banks’ lending to firms. After five years ofuninterrupted growth, banks’ lending to firms was 1,220 mdr SEK in 2008. Thereafter,lending started to decline, and in both 2009 and 2010 Swedish banks’ lending to firmswere approximately 1,050 mdr SEK (Svenska Bankforeningen, 2012). The chosen bankis particularly intriguing as it suffered large credit losses in the wake of the financialcrisis that started at the end of last decade, despite the fact that the Swedish bankingindustry had previously faced a severe crisis situation in the early 1990s that hadrequired drastic changes and greater risk awareness. As will be explained, the recentcircumstances resulted in practices based on tighter regulation, a new lending strategyand more focus on the control and support system for this bank. These developmentsoffered an opportunity to address our research questions empirically.

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The outline of the remainder of the paper is the following. First, we present ourtheoretical frame of reference by highlighting individual level loan assessment research,explicating the concept of defensive behaviour and linking it to the empirical context ofinterest here, and identifying plausible triggering mechanisms that according toprevious research may underlie defensive behaviour. This is followed by the methodssection. Thereafter we present and discuss the empirical evidence. In the final section, weprovide conclusions, including our theoretical contribution, implications for practice andsuggestions for future research.

2. Theoretical frame of reference2.1 Individual level research on loan assessmentIt is part of bank routines that a LO’s initial assessment of a loan application is conveyedto a credit committee, which makes the decision to approve or reject the loan application(Fletcher, 1995; Zambaldi et al., 2011). The information that LOs collect, process andtransmit about existing and potential clients can be divided in two categories: hard,quantitative information and soft, qualitative information. Prior literature suggests thatLOs focus primarily on hard information such as financial statements, collateral, andcash flow forecasts in the loan assessment process (Berry and Robertson, 2006; Libertiand Mian, 2009). Soft information includes the nature of the client relationship, reasonsfor the failure or success of the current owner/managers in the present and otherbusiness, market conditions, and the business idea deployed (Mason and Stark, 2004;Udell, 2008). Such information may broaden the knowledge about existing andprospective clients (Behr and Guttler, 2007; Ferrary, 2002).

One stream of literature in the loan assessment area draws on the human informationprocessing research tradition (Yazdipour, 2011), which addresses loan assessment froma judgmental point of view. Several studies draw on experimental designs and aim toidentify decision strategies and biases (Andersson, 2004; Ruchala et al., 1996; Taylor,1995). One finding is that once an initial loan has been granted, escalation of commitmentcan cause LOs to suggest to the credit committee that it grants additional loans, despiteinformation signalling considerable risk. The risk for such a bias is most conspicuous ifa LO strongly identifies with the initial assessment, and if (s)he expects a low likelihoodfor blame should the loan not be repaid, due to diffusion of responsibility (Ruchala et al.,1996). There are also indications that switching between different decision supportsystems improves LO performance (Wheeler and Jones, 2006).

A second stream of research related to LO behaviour when assessing loanapplications draws on agency theory. Findings suggest that if bad news will reflectnegatively on the LOs’ professional abilities, they choose not to report such news tobank managers (Herzberg et al., 2010). Moreover, when there is a difference betweenthe information collection tasks of an LO and the decision making responsibility of acredit committee, distance between these parties tends to lead to reliance on hard ratherthan soft information (Liberti and Mian, 2009).

2.2 The concept of defensive behaviourAlthough the issue of defensiveness in relation to risk has been raised by Power (2004),and its implications for strategic learning has been touched upon by Starbuck et al.(2008), it would seem necessary to turn to earlier literature to determine how defensivebehaviour can be defined. From a conceptual point of view, some bodies of work are

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particularly notable, for example that of Argyris (1977, 1985, 1990a, b) followed byAshforth and Lee (1990) and that of Sterman (1994). It is suggested that defensivebehaviour is characterised by “little additivity in problem solving, low openness andtrust, and high conformity and covering up of threatening issues” (Argyris, 1977,p. 119). Ashforth and Lee (1990) position defensive behaviours[1] as part of politicalbehaviour, i.e. discretionary social influence attempts to promote or protect theself-interests of individuals or groups (Porter et al., 1981). Ashforth and Lee (1990,p. 622) define defensive behaviours as “reactive and protective actions intended toreduce a perceived threat or to avoid an unwanted demand of an individual or group”.

More recently, other scholars use related concepts in different strands of literature.For example, Giammarino et al. (1997) examine defensive mechanisms and managerialdiscretion in takeovers; Balthazard et al. (2000) find evidence of dysfunctional defensivestyles, which they link to a dysfunctional organisational culture; and Sweeney andPierce (2006) analyse the manipulation of time reports among auditors in terms of adefensive mechanism. Trubik and Smith (2000) draw on the idea of defensive behaviourin relation to offensive (attracting new clients) and defensive (preserving existingclients) strategies in the banking industry, while Worthington and Patton (2005) analysepressures for environmental performance and Wilson and Eilertsen (2010) illustrateproactive and defensive firm-level responses to the economic crisis. Sweeney and Swait(2008) and Chebat et al. (2011) highlight the role of branding and switching costs asdefensive marketing tools for deterring customers from changing to another supplier.

For the purposes of the present paper, we draw primarily on Argyris (1977, 1985,1990a, b) and Ashforth and Lee (1990) when we define defensive behaviour among LOsin terms of reactive and protective actions intended to protect oneself from experiencingembarrassment or threat. The identity of a LO as a competent professional is built andmaintained by keeping his/her conduct in line with the expectations of the creditcommittee and management of the bank (Jonsson, 1996, p. 103). Ashforth and Lee (1990)propose that defensive behaviour typically is intended to avoid action, blame and/orchange. For a LO engaged in assessing loan applications in a shifting economic climate,characterised by regulative initiatives, it can appear rational to avoid risk and situationsthat might reflect negatively upon the individual, thus avoiding blame (Ashforth andLee, 1990; Herzberg et al., 2010). One possible tactic might be to over-conform. If changethreatens to disrupt routines and taken-for-granted behaviours, LOs can insteaddisregard the associated information or signals may go undetected. Avoidance of actionmay also presuppose the appearance of action. Thus, LOs can request and collectinformation beyond the level of information needed for their loan assessments, i.e. theyare using information symbolically (Feldman and March, 1981).

2.3 Mechanisms[2] that trigger defensive behaviour among LOsBoth Ashforth and Lee (1990) and Argyris (1990b) posit that antecedents to defensivebehaviour may reside at environmental, organisational and individual levels. A financialcrisis and a weak economic climate can be among the environmental level mechanismsthat trigger defensive loan assessment behaviour among LOs (Goddard et al., 2009).Increasing regulation through the Basel Accords can affect a banks’ inclination to competein the commercial lending market, as uniform capital requirements are advocated in thename of equal competition (Wahlstrom, 2009). Thus, LOs may pay increasing attention toformalisation and accountability (Ashforth and Lee, 1990).


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On the firm level, successful performance is often linked to the existence of awell-configured mission and business strategy, where different components areinterconnected and contribute to the success of the organisation as a whole (Nilsson andHackner, 2007; Siggelkow, 2001). When a bank’s strategy is ambiguous such that its’components do not fit with each other and/or they are unclear to the LOs, they mayrespond by attempting to protect themselves, thus behaving defensively. Moreover, thebank’s management and credit committee are responsible for results and need to findways to “reduce the probability and cost of error” (Argyris, 1977, p. 115) in loanassessments. One approach to take is to devise control and support systems that signalwhen a loan application deviates from desired tolerances. When credit-grantingprocedures are strongly regulated and standardised, LOs are expected to commencetheir assessment by processing information about an application through the controland support system used (Rada, 2008). However, as suggested by Jonsson (1996), theinformation processed in central control systems may contrast with information needson a local level. On a local level, such as that of a LO, information needs may haveconcrete and intuitive features, and include causal processes as well as closeness to theunique case. Local information is less manageable and less transferable through acontrol and support system (Van der Veeken and Wouters, 2002). It may thus receiverelatively less attention when it comes to lending decisions, and errors related to itsabsence may go undetected. Central or “distant” control systems, on the other hand, tendto be oriented towards output, impartiality, distance from single cases, and an emphasison overall trends, and demand corresponding information (Hackner and Nilsson, 2008).

Control and support systems convey hard information within a bank’s organisation(Rada, 2008; Udell, 2008) and structure the assessments made by LOs (Kumra et al.,2006). These systems emphasise “facts” about a loan applicant (McSweeney, 1996)rather than more subjective and case sensitive impressions. The credit committees relyprimarily on information from the control and support systems. Reliance on hard dataon credit risk criteria processed in a control and support system, rather than oninterpretations based on soft information, can represent a way for a LO to behavedefensively in a demanding and challenging situation (Argyris, 1990a, b). The use ofnumbers signals responsible and justifiable decision making when exercising control(Chua, 1996). Soft information is typically not numerical, hence it is difficult to transmitfrom sender to LOs and onwards to the credit committee and bank management(Bhimani and Langfield-Smith, 2007).

When bank management and the credit committee need to “reduce the probability andcost of error” (Argyris, 1977, p. 115) in loan assessments, there are two types of errors thatmay need to be considered. As mentioned in Section 1, Type I errors occur when a loan isrejected that has the potential to be repaid with interest, implying a net revenue loss for thebank. Type II errors occur when the bank approves loans that eventually result in a creditloss for the bank. However, evidence suggests that LOs tend to focus primarily onreducing Type II errors (Deakins and Hussain, 1994a, b). One possible contributing factoris that the Basel Accords are essential to the regulative system of banks (Wahlstrom,2009). The Accords emphasise credit risk in order to promote prudence in the bankingsector, which may contribute to the importance attributed to Type II errors in loanassessments. This type of error is detectable and therefore more likely to createembarrassment or threat than Type I errors. A fear of making mistakes among LOs islikely to encourage defensive loan assessment behaviour.

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3. Method3.1 Study context and research designFour domestic banks control 74 per cent of the Swedish lending market, suggesting anoligopolistic competitive situation (Svenska Bankforeningen, 2012). Our data forms partof the results from a research program of SME loan assessments in one of these banks,which gave us permission to collect and analyse empirical data. The selected bank is oneof the banks in which Wahlstrom (2009) studied perceptions of the Basel Accords, and itoperates in several bank office locations in different regions. In this case study, we focuson the mid-Sweden region, and the LO and credit committee level, where the practice ofloan assessment occurs and risk is managed (Wahlstrom, 2009). The mid-Sweden regionincludes three counties with a number of bank office locations, credit committees andLOs. LOs present their assessments of SME loan applications to credit committeesincluding bank managers and experienced LOs, and the credit committee decides if aloan will be granted or not. LOs in the bank in this study are compensated only by theirsalaries, i.e. they do not receive bonuses if loan applications are approved.

At the time of the study, which took place at the end of 2009 and the beginning of 2010,the bank was affected by a weak economic climate, new regulative initiatives includingthe Basel Accords, and a low intensity of price competition. As a result of the bank’scredit losses in the wake of the recent financial crisis, a new lending strategy wasformulated. It was emphasised that LOs should start to focus extensively on futurerepayment capability, i.e. a shift from historical to future-oriented information basedassessments. It was also emphasised that the bank wanted to have clients with most oftheir financial affairs with the bank, i.e. a total client strategy. To manage and facilitatethe loan assessment process the bank’s control and support system was given a moreprominent role than it had previously. Taken together, several significant changesintended to strengthen risk awareness had started to affect LOs at the time of the study.

In a case study, one key approach for mitigating the likelihood of biased results is touse highly knowledgeable participants (Eisenhardt and Graebner, 2007). LOs with lessthan one year’s work experience in a bank office location in the selected bank andregion were excluded due to the potential for them to not be able to answer thequestions adequately[3]. At the time of the study, the total number of available LOswith at least one year’s work experience, and regional bank managers with previousLO experience was 83. Seven LOs did not answer the questionnaire due to lack of time,leaving 76 LOs as participants. The sample included different categories of LOs withrespect to position, location, gender, education and experience (Table I).

The study was conducted using a combination of a questionnaire study and a focusgroup interview session. The reason for this blend of methods was that we wanted the LOsto first reflect individually on their work, and then to deepen and widen the knowledgeabout SME loan assessments through communicative interaction (Blumer, 1969; Qu andDumay, 2011). Five of the 76 participants participated in the focus group session. Thechoice of these participants was made with respect to background variables. In particular,we included both LOs in the field (3) and LOs in the position of bank managers and creditcommittee members (2) to capture different frames of reference (Wahlstrom, 2009).

3.2 Data collection, analysis and limitationsThe questionnaire included seven open-ended questions (Appendix), and wasadministered to participants in the autumn of 2009. The questions were intended to


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elicit the participants’ perceptions about SME loan assessments in a changing bankenvironment. The first three questions focused on possible changes that had occurredin loan assessments during the last few years and what the participants consideredpossible to assess more or less extensively. The next two questions focused on the LOs’likelihood of negotiating lending conditions in view of the situation at hand. Finally,the participants were asked if they had any further comments to add, and if they hadexperience as a business person.

When analysing the written answers, we found indications of defensive behaviour aswell as to the contrary. We used a coding scheme (Appendix), and decided to code eachanswer to each question in only one category, giving a total of 76 answers for eachquestion. Regarding question 1, the first category was labelled “no change”, indicatingthat a participant was unable to see that loan assessments in the bank had changedduring the last few years. Another category of defensive behaviour was the perceivedchange towards collateral and/or a more intense use of the bank’s control and supportsystem (the second category). The third and the fourth categories – an observed changetowards future-oriented information and/or future repayment capability, and anobserved change towards both future repayment capability and collateral – were notclassified as defensive behaviour. The assessment of future-oriented information wasconsidered to require discretion on behalf of a LO rather than reactive and protectivemeasures.

Regarding the second question, the first and the fourth category – no need to increaseany kind of information, and a need to increase all kinds of information – wereinterpreted as indications of defensive behaviour in accordance with the frame ofreference section. Regarding the third question, only the first category – no need todecrease any kind of information – was classified as a sign of defensive behaviour.In questions 4 and 5, we considered “none or insignificant room for negotiations due todifferent triggering mechanisms” to be indications of defensive behaviour. Forquestion 6, answers highlighting a strong focus on hard information used in the bank’scontrol and support system or that a participant disregards personal relationships wereclassified as signs of defensive behaviour. Question 7 only included two categories(yes or no). Moreover, separate categories were used for participants that did not answera particular question.

We individually interpreted and categorised the answers of the first 15 participants(20 per cent of the sample) before we compared our classifications and discussed theinstances where they differed (procedures used by Butterfield et al., 1996). In doing so,we categorised 92 percent of the answers identically, and more important, in all caseswe agreed whether or not an answer was an indication of defensive behaviour. Whereour initial classifications differed, we discussed our interpretations until we arrived atagreement. Following this initial categorisation, one of us categorised the responses ofthe remaining participants. We then discussed the few cases considered to beuncertain. These discussions resulted in minor adjustments to the categorisations.

The focus group interview with the five selected participants was held after an initialanalysis of the findings from the questionnaire study, to develop a deeper understandingthan that captured by the open-ended questions. During a three hour session in thebeginning of 2010, we discussed the 76 participants’ answers to the open-endedquestions and the compiled findings. At the end of the session, we inquired about thebank’s external environment, SME loan assessment procedure, lending strategy, and


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control and support system, in order to confirm and extend our understanding of theLOs’ working conditions. The focus group interview was recorded and transcribed, andeach participant’s statements were analysed in relation to the statements of the otherparticipants and the 76 participants’ written answers.

There are several limitations of the present study that need to be mentioned. First, thestudy relies on a questionnaire and a focus group interview and could have benefitedfrom other data collection approaches, including participant observation. However, theconfidentiality of banks can preclude such data collection approaches, and as will bedemonstrated in the next section, our findings from the focus group session validate theparticipants’ answers to the open-ended questions. Second, the study does not allow usto empirically demonstrate explanatory cause-and-effect relationships betweentriggering mechanisms and different indications of defensive behaviour. Rather, thefindings do indicate that relationships between triggering mechanisms and behavioursmay be characterised by equifinality and multifinality (Norreklit, 2000). Third, we areunable to establish a pattern concerning relationships that may exist among triggeringmechanisms or among indications of defensive behaviours.

4. FindingsThe findings related to each question in the questionnaire are numerically summarisedin the Appendix. Below, these findings are presented together with findings from thefocus group session. The main themes characterising our data are shown in italics.Overall, the differences between groups of participants are few. The most significantdifference between bank managers and other LOs are commented on below. It shouldbe noted that seven of the nine participants who did not reveal any signs of defensivebehaviour were LOs with long bank tenure and little formal education (public school).

4.1 Indications of defensive behaviourAt an aggregated level, several indications of defensive behaviour are found. In total,67 participants expressed such signs, 51 of them on two or more questions. Six of theparticipants insisted that there had been no significant changes in the assessment ofSME loan applications over the last few years. This was expressed in the followingway by a participant when answering question 1:

No, I cannot see that it has changed. The loan assessments are performed in the same way asbefore.

Furthermore, 17 participants were unable to suggest anything to assess moreextensively (question 2), and 30 participants were unable to suggest anything to assessless extensively (question 3). The “lack of willingness to change” can be illustrated bythe following response:

I do not think that it is necessary to add or take away anything from what we do.

In addition to the reluctance to change, four participants revealed a “desire to collectmore information than actually used” thus indicating another kind of defensivebehaviour. Those LOs would prefer to see an increased amount of all kinds ofinformation (question 2):

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It is important to observe the person behind the company, and to use both hard and softinformation. This is the hardest part of the assessment procedure, and a lot of information isneeded.

A total number of 41 participants wrote that these days they are more concerned aboutfuture-oriented information and the applicants’ future repayment capability. Notably,all 13 bank managers expressed a forward-looking approach. As one banker managernoted in answering question 1:

The assessments are much more forward-looking today. The applicants’ future ability torepay the loans has become more pronounced than ever. Earlier, our assessments were morehistorical information based.

The fact that all of the bank managers in the study expressed a forward-lookingapproach indicates a greater ability and/or willingness among those individuals toadopt this approach than among the other participants in the study. In contrast, manyLOs in the latter group (23) expressed an alternative shift in focus. These participantsarticulated a perceived focus towards more risk reduction in line with the followinganswer (question 1):

Nowadays it is more focus on risk than opportunity. Everything is assessed from a worst casescenario.

The three LOs without bank manager experience who participated in the focus group,said that it was easier for members of the credit committees to make sense of hardinformation than soft. Soft information is considered difficult to capture in the bank’scontrol and support system. Therefore, it needs to be transmitted by LOs in oral formto the committees. A possible reason for the perceived difficulties to persuade thecommittee members with soft information such as business idea characteristics is theLOs’ lack of business experience. Only 20 percent of the participants (16 of 76) haveprevious experience as entrepreneurs or business persons, and in most cases theirexperience is rather limited and/or outdated. The three LOs argued that secondopinions from colleagues are needed to convince credit committee members to approvea loan application based on soft information. Occasionally, these second opinions areused for confirmation and support of a LO’s initial assessment.

Several LOs expressed that they are “keen to look good in the eyes of the creditcommittees”, and the way in which LOs proposals are treated by the credit committeeswas given much attention in the focus group meeting. There was consensus that acredit committee is and should be the loan assessment decision-making body.However, it appeared rather surprising for the two bank managers in the focus groupwhen one of the other focus group participants stated that:

One of the worst things that could happen is if the credit committee say no to my proposal togrant a loan to a client.

Such a situation was said to be almost equally embarrassing for the LO as a situation inwhich the credit committee approves a recommended application that eventually turnout to be a Type II error. The impact on LOs when the credit committee decides to reject arecommended loan application was expressed in a rather wordy answer by one of the76 questionnaire respondents, who obviously had received a “slap on the wrist” whentrying to convince the credit committee to grant a loan:


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I have become little harsher in the view of my work, according to the high collateralrequirements and the focus on low risk. I have tried to be open to new ideas and see thepossibilities in the loan applications since all clients are supposed to have a chance to borrowmoney. After being involved in a few credit losses and then being turned down by the creditcommittee, it is clear that I think more of the bank’s loss risks than earning opportunities.Unfortunately!

Moreover, 12 participants showed signs of defensive behaviour in answering thequestion (6) on additional information. These participants argued explicitly that theyfocus heavily on hard information used in the bank’s control and support systems orthey disregard personal relationships when assessing loan applications.

4.2 The impact of triggering mechanismsA majority of the participants could identify circumstances that affected theirdiscretion to negotiate loans negatively. For one thing, price competition was moreintense between banks in the mid-Sweden region before the financial crisis. At thattime it was rather easy for clients to manoeuvre banks to receive loans with morefavourable conditions. When the economic climate weakened, the control and supportsystem changed, and the price competition between the banks declined, clients had totake or leave the lending conditions offered. A total of 45 participants answeredquestion 4 in a way that suggests decreased room for LOs to negotiate lendingconditions. Moreover, it was confirmed in the focus group that the propensity of thebank and its LOs to determine lending conditions without negotiating with the clientsincreased after the financial crisis:

In a booming market, the competition between banks is very stiff. After the recession, thebank is prepared to lose good clients who want to borrow more money, if collaterals are notcompletely satisfactory. Negotiations on the terms of the loan are less common in recession.We calculate interest rates based on risk, which represents no negotiating conditions. It’s upto the bank to decide if we want to do business with the client or not.

A perceived consequence of the regulations in the Basel Accords, and the bank’scontrol and support system was articulated as a defensive approach to business in oneparticipant’s written answer to question 4:

The conditions in the bank today, with increased regulation and control, are likely to give us adefensive approach to business.

In addition to this, the focus group revealed that LOs’ assessments commence withconsidering hard information required by the bank’s control and support system. Thedesign and use of this system was explained by the two bank managers in the focusgroup as a need for structuring the assessment process, and by the relative ease oftransmitting hard information in such a way. A consequence of using the control andsupport system is that LOs consider the same basic criteria, independent of type ofloan, so that all applicants are treated in a similar way. It was also argued that severalLOs are emphasising risk more than earning opportunities when they assess loanapplications. A reason for this was said to be that LOs are motivated by the control andsupport system to focus on collaterals and to avoid credit losses for the bank, i.e. TypeII errors. A related comment was expressed in one of the written answers (question 1):

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We nowadays use the control and support systems frequently. That has opened my eyes forrisk, and I have become much more cautious than before.

The focus group interview confirmed that nowadays it is part of “the bank’s lendingstrategy” to focus extensively on the future, and that every LO attempts to build an imageof the applicants in order to foresee their ability to repay a loan with interest. It was alsoconfirmed that the bank has emphasised risk reduction in the wake of the financial crisis,and in line with the Basel Accords. Notably, the focus group session revealed that it ispossible for LOs to interpret this “double message” – a focus on both future repaymentcapability and risk reduction – in his or her own way. Such an interpretation could bedefensive and, as noted above, 23 participants expressed a one-sided focus on riskreduction. As one participant noted in their response to question 1:

We approve almost no full funding, and require several types of collaterals (bonds, mortgagecompanies and/or pledges of private property). The applicants should be pretty strongfinancially to be allowed to borrow money needed for their business.

When the impact of “the banks’ total client strategy” on the possibilities of LOs tonegotiate lending conditions was considered (question 5), a total number of70 participants saw such a connection. Around half of these described theimportance of the relationship between LO and client and/or profitability conditions,while the others explicitly emphasised that the bank wants to have clients with most oftheir financial affairs with the bank:

The banks’ total client strategy has a major influence. We can do a better arrangement forclients with all their affairs in the bank, and develop better relationships with those clients ona business level. These clients are given a larger room for negotiations.

The two bank managers in the focus group explained that the bank’s total clientstrategy is a way for the bank to focus on the revenue side of bank affairs. The idea isto retain clients and to expand business with them. This indicates that the bank’s totalclient strategy positively affects LOs’ possibilities to negotiate lending conditions (incontrast to circumstances reducing the perceived room for lending negotiations).Accordingly, in this case only six participants showed signs of defensive behaviour,suggesting none or little room for negotiations with clients who have most of theirfinancial affairs with the bank. The reason for the perceived lack of discretion tonegotiate lending conditions was said to be the bank’s control and support system.

5. DiscussionThe discussion of findings is presented in three subsections in order for thesesubsections to serve as a bridge between the research questions posed in theintroductory section and the conclusions which follow in the final section.

5.1 Defensive loan assessment behaviourWe find a fairly strong tendency towards unwillingness to change among LOs in the bankstudied. Given the contextual conditions surrounding the bank at the time of the study,their lack of willingness to change could be considered rather surprising, althoughWahlstrom (2009) found similar results in relation to reactions among LOs to the BaselAccords. In our case study, the lack of willingness to change among LOs appears to berelated not only to regulation but also to the financial crisis, the weak economic climate, the


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lowering of price competition, the bank’s new lending strategy and the bank’s control andsupport system. Moreover, while Ashforth and Lee (1990) tentatively suggested thatdefensive behaviour can be activated in order to avoid change, our empirical findingssupport their view in the specific loan assessment context.

Our study also suggests a rather strong tendency towards risk reduction among LOsinvolved in SME loan assessment. This finding may perhaps seem less surprising thanthe previous one, given the external and internal conditions characterising the bankstudied. Irrespective of this observation, however, we have been unable to identifyprevious research that empirically demonstrates how LOs’ loan assessment becomeshighly defensive and risk-oriented when surrounding conditions play out in a certainway. Our findings suggest different ways in which risk reduction can manifest itself in aloan assessment context. In particular, for a richer understanding of defensive loanassessment behaviour, the option not to approve a loan application needs to besupplemented with alternative strategies including the granting of loans with collateralor with a higher risk premium (interest rate), and with the possibility of grantingfinancing only to total clients. It would also appear that defensive loan assessmentbehaviour might explain the difficulty to obtain financing which appears to characteriseSMEs (Beck and Demirguc-Kunt, 2006).

In the bank studied, LOs seem to rely fairly extensively on hard information whenassessing SME loan applications. The findings also suggest that LOs consider itimportant to make a good, i.e. professional, impression when facing the creditcommittee ( Jonsson, 1996). Indeed, making a good impression appears to be closelylinked to the use of hard information in credit committee meetings. Reliance on hardinformation corroborates the pattern found in previous studies (Chua, 1996; Berry andRobertson, 2006; Kumra et al., 2006; Bhimani and Langfield-Smith, 2007), although thepotentially defensive connotations of this type of information use have not beenhighlighted in prior studies of loan assessment. The reliance on hard information foundin this case study may not only be linked to the difficulty of communicating softinformation from LO to credit committee members (Liberti and Mian, 2009) but also toLOs’ attempts to protect themselves when presenting their loan assessments.

We find some indications that LOs can choose to over-conform by strictly assessinga loan application according to the standard procedure encapsulated by the control andsupport system, at the expense of considering particular nuances of an individual case(Argyris, 1977; Jonsson, 1996; Ashforth and Lee, 1990). Our findings suggest thatexisting loan assessment routines begin with the use of hard information, which can beprocessed in the control and support system (Van der Veeken and Wouters, 2002;Kumra et al., 2006; Rada, 2008; Udell, 2008). LOs are accountable to the bank and thecredit committee and may prefer to make their case concerning a loan applicationbased on information which is perceived to be “factual” (McSweeney, 1996). LOs tendto be reluctant to promote applications that they are not confident that the creditcommittee will approve. This type of over-conforming behaviour is likely where a LOhas previously received “a slap on the wrist” by the credit committee, and therefore iseager to avoid blame in the future.

We also find a few signs of defensive behaviour in terms of using informationsymbolically (Feldman and March, 1981). These LOs are inclined to appear to actprofessionally by assessing loan applications using a large amount of varying kinds ofinformation.

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In sum, the findings support the proposition that SME loan assessment by LOs canbecome defensive. Moreover, our findings point towards a broad conceptualisation ofdefensive loan assessment behaviour, which takes into account that the fact thatdefensiveness is not binary but a multifaceted construct.

5.2 Triggering mechanisms and effects on the bank and the LOsIn our case study, we find a number of factors that appear to serve as triggeringmechanisms for defensive loan assessment by LOs in relation to SME loan applications.In particular, we find rather strong support for the impact of the recent financial crisis, theweak economic climate, the lowering of price competition and the increase in regulation onloan assessment on defensive loan assessment, such that defensiveness is encouraged bythese factors. At the bank level, we find fairly strong tendencies suggesting that defensiveloan assessment behaviour can be exacerbated by a bank’s lending strategy, if it is open tomultiple interpretations. While some LOs interpret the strategy to be primarily orientedtowards future repayment capability, others focus on risk reduction related to the bank’scontrol and support system and a one-sided orientation towards detectable Type II errors(Deakins and Hussain, 1994a, b). In this case, the control and support system does not seemto ensure an ideal match between lending strategy and loan assessment behaviour(Anthony, 1965; Berger and Udell, 2004).

Arguably, defensiveness has been linked to environmental factors by Power (2009)and Goddard et al. (2009), and such a relationship may be inferred between regulationand LO behaviour in the findings of Wahlstrom (2009). However, our empiricalfindings provide a richer and more complex understanding of triggering mechanisms,both external and internal to the bank, behind defensive loan assessment behaviourthan prior studies. Moreover, our findings offer suggest that defensiveness may be alsotriggered by individual level factors including sense-making problems concerning softinformation as a result of too little business experience among LOs, and a fear ofmaking mistakes.

For the bank studied, our findings offer strong evidence that defensive loanassessment behaviour will lead to a reduction in risk exposure (which is supported by adecline in bank lending to firms in the wake of the financial crisis). On the one hand,this kind of effect can be considered precisely what a wise bank management maywant to achieve under environmental conditions like the ones of interest here. On theother hand, it is interesting to also consider the effects of risk avoidance in relation tothe propensity to commit Type I and Type II errors (Deakins and Hussain, 1994a, b;Dietsch and Petey, 2002). In particular, a bank is likely to commit fewer Type II errors(make lower credit losses) and score favourably on performance measures in thisrespect. However, it is equally plausible that an increasing number of Type I errors willbe committed as a result of defensiveness. In turn, such an effect will influence thesurvival and/or growth prospects of SMEs that turn to the bank for financing. Forindividual LOs, the above scenario will contribute to the avoidance of blame for errorscommitted (Herzberg et al., 2010), as the rejection of loan application that would havebeen repaid cannot be recorded in the control and support system of the bank.

5.3 A preliminary framework for defensive loan assessment behaviourAs outlined above, the findings from this case study suggest that external and internalmechanisms jointly trigger defensive loan assessment among LOs who handle loan


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applications from SMEs, and this defensiveness should be considered a broad andmultifaceted construct. Moreover, the effects of defensive loan assessment behaviourwill include fewer Type II errors (credit losses) and more undetectable Type I errors.For individual LOs, defensive behaviour will contribute to the avoidance of blame forerrors committed, as the number of detectable errors will decline. Another possibleeffect at the individual LO level is less risk-taking by avoiding change. Thesetriggering mechanisms, behaviours and effects are summarized in a preliminaryframework shown in Figure 1.

The preliminary framework proposes external triggering mechanisms on a macrolevel and internal mechanisms on a bank- and individual level, defensive behaviour indifferent forms as well as bank- and individual level effects.

6. Conclusions, implications and research suggestionsThis paper uses qualitative data from a case study conducted in three different branchoffices of a major Swedish commercial bank to develop knowledge concerning thephenomenon of defensive loan assessment behaviour among LOs who are responsiblefor handling loan applications from SMEs. This case was selected becausethe contextual conditions of the bank and the time period of the study offereda unique opportunity to conduct research in this area.

This study reveals that in a risk-averse banking environment, loan applicationsfrom SMEs can be assessed defensively by LOs to a considerable extent. It also showsthat such defensiveness may take several different forms, including granting loanswith greater requirements for collateral, charging a higher risk premium (interest rate),or exclusive granting of loans to customers with all their financial affairs with thebank.

According to our findings, the reasons for defensive loan assessment includeexternal conditions such as the presence of a financial crisis and/or a weak economicclimate, pressures towards regulation, and a decline in price competition (which may

Figure 1.Triggering mechanisms,LO defensive behaviour,and effects on the bankand the LOs

Triggeringmechanisms

LO defensivebehaviour

Effects on the bankand the LOs

External (macro level)Financial crisis

Weak economic climateIncreasing regulationLow intensity of price

competition

No loansBank level

Avoiding risk- fewer Type II errors- more Type I errors

Loans with- more collateral

- higher interest rate Internal (bank level)

Ambiguity of lending strategyControl and support system

LO level

Avoiding blameAvoiding change

Internal (LO level)Sense-making problems

concerning soft informationFear of making mistakes

Loans to total clients

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itself be considered a result of a financial crisis). On the bank level, our findingssuggest that such defensiveness may be caused by an ambiguous lending strategyand/or by a control and support system that favours considerable reliance on hardinformation. On the individual level, we find that sense-making problems concerningsoft information and a fear among LOs to make mistakes, also may contribute todefensive loan assessment behaviour.

We also conclude that at the bank level, defensive loan assessment behaviour mayresult in more (undetectable) Type I errors and fewer (detectable) Type II errors, thelatter of which will be monitored by the bank’s control and support system. Moreover,individual LO may avoid blame or change as a result of this kind of defensiveness.

As our research was conducted as a single case study, the findings do not lendthemselves to statistical generalisation. Instead, we propose that one contribution ofthis study is that it puts theory on loan assessment and defensive behaviour in contactwith empirical reality, thus opening up the possibility for theoretical generalisation(Vaivio, 2008). In terms of theory development on loan assessment, one implication ofthis study is that defensive behaviour in SME loan assessment should be considered asa multifaceted construct rather than a binary phenomenon. Another theoreticalimplication is that explanations of defensive SME loan assessment behaviour amongLOs are complex and may require taking different mechanisms into accountsimultaneously. Hence, one implication for future research is that it will be fruitful toexamine several independent variables on different levels of analysis in order toexplain loan assessment behaviour.

For business owners and managers seeking bank financing, it would seem to behighly important to back up a loan application with financial “facts” that can beprocessed internally by a bank and presented to its credit committee in order to obtaina loan approval. As shown by Halabi et al. (2010), this can be challenging for an SMEowner/manager. From a bank managers’ or a control and support system designers’point of view, our findings illustrate the value of understanding the operationalimplications of the way in which a control and support system is configured. It wouldseem that a system in this type of setting would benefit from being less orientedtowards providing answers (“are key ratios in order?”) and more oriented towardspromoting inquiry, debate and dialogue (“why these key ratios? Is it plausible thatmanagement can improve ratios that aren’t satisfactory?”). Finally, our findingssuggest that one way in which the “undetectable” but nevertheless problematic TypeI errors might be combated is if LOs were to regain discretion to negotiate lendingconditions. The phenomenon of defensive loan assessment behaviour, its triggeringmechanisms and effects, are relatively unexplored and are a fertile ground for futureresearch.

Notes

1. Ashforth and Lee (1990) use the plural form, to convey that several behaviours may bedefensive.

2. Arguably, “mechanisms” imply a technical relationship and it could be claimed that thisterm is more suited to physics than social science. One alternative would be “drivers” andanother might be “triggers”. Because “drivers” have rather forceful connotations and we arenot entirely happy with “triggers”, we have decided to stick to “mechanisms”.


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3. One result of this approach was that in the four cases where the participants had beenemployed between one or two years, their responses concerned the time period of theiremployment although the questions originally were designed to cover a longer time period(Appendix).

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Appendix

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Table AI.Answers to theopen-ended questions

QRAM9,2

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2)

Table AI.


behaviour

167

Qualitative Research in Accounting & Management

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Transcript of Qualitative Research in Accounting & Management