<p>The situation described here is one of <em>credit rationing</em>. An explanation for this phenomenon was provided <a href="https://en.wikipedia.org/wiki/Credit_rationing#Equilibrium_credit_rationing_%E2%80%93_Stiglitz_and_Weiss" rel="nofollow noreferrer">by Stiglitz and Weiss</a> in their famous 1981 AER paper. The short answer is that <em>adverse selection</em> keeps the bank from increasing its interest rate since this would also increase the average risk of the projects of loan applicants and thus more than offset the gains from expanding the supply of loans.</p>

CC BY-SA 4.0
2024-04-25T13:58:53.820Z
Thank you! But is there a rationale behind the random selection of clients? (is it just because the bank is unable to distinguish good clients from bad ones?)
ZZZ
CC BY-SA 4.0
2024-04-26T11:18:10.777Z
@ZZZ, yes, the loan applicants are indistinguishable for the bank, so random allocation is more or less the only possible method.
VARulle
CC BY-SA 4.0
2024-04-25T08:09:31.390Z
2024-04-25T08:09:31.390Z
VARulle
<p>In general, there are two reasons why someone's loan application is denied, income and credit score. Credit has become the default metric for measuring trustworthiness in terms of finances. A good credit score signals to banks, employers, landlords, etc that you're likely punctual in paying the bills, that you make good financial decisions, have a history of income stability, etc.</p>

CC BY-SA 4.0
2024-05-17T05:14:21.540Z
2024-05-17T05:14:21.540Z
Aristocratic Jack
<p>Bank AAA is the only bank in the country and it has a very strange loan policy. It
sets a relatively low interest rate for loans (but still high enough to make a profit) so that the demand for loans exceeds the amount of money the bank can lend. As a result, it has to deny some applications. However, it cannot check any credit history or do any client analysis; so, it chooses which applications to deny at random. What is the rationale for such a policy?</p>
<p>My Thinking:
It does make sense because the bank cannot check the credit history of clients, so doing so can make sure that the clients' credibility is at the average level of the nation if the bank has enough clients. However, are there any concrete math theories/game theories behind it that can help to explain the decision?</p>
<p>Thank you in advance!</p>

<mathematical-economics><finance><banking>
What is the rationale behind randomly denying clients for loans
ZZZ
# What is the rationale behind randomly denying clients for loans

(Asked by: username_0 on 2024-04-24)

Bank AAA is the only bank in the country and it has a very strange loan policy. It
sets a relatively low interest rate for loans (but still high enough to make a profit) so that the demand for loans exceeds the amount of money the bank can lend. As a result, it has to deny some applications. However, it cannot check any credit history or do any client analysis; so, it chooses which applications to deny at random. What is the rationale for such a policy?

My Thinking:
It does make sense because the bank cannot check the credit history of clients, so doing so can make sure that the clients' credibility is at the average level of the nation if the bank has enough clients. However, are there any concrete math theories/game theories behind it that can help to explain the decision?

Thank you in advance!

**Tags:** mathematical-economics, finance, banking

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## 2 answers

### Answer by username_1 on 2024-04-25. Score: 2 | Accepted answer

The situation described here is one of *credit rationing*. An explanation for this phenomenon was provided [by Stiglitz and Weiss](https://en.wikipedia.org/wiki/Credit_rationing#Equilibrium_credit_rationing_%E2%80%93_Stiglitz_and_Weiss) in their famous 1981 AER paper. The short answer is that *adverse selection* keeps the bank from increasing its interest rate since this would also increase the average risk of the projects of loan applicants and thus more than offset the gains from expanding the supply of loans.

> **Comments:**
> **username_0**: Thank you! But is there a rationale behind the random selection of clients? (is it just because the bank is unable to distinguish good clients from bad ones?)  
> **username_1**: @ZZZ, yes, the loan applicants are indistinguishable for the bank, so random allocation is more or less the only possible method.  

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### Answer by username_2 on 2024-05-17. Score: 0

In general, there are two reasons why someone's loan application is denied, income and credit score. Credit has become the default metric for measuring trustworthiness in terms of finances. A good credit score signals to banks, employers, landlords, etc that you're likely punctual in paying the bills, that you make good financial decisions, have a history of income stability, etc.


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