Substitutes versus complements among credit risk management tools

Practitioners, regulators and researchers have long recognized important conceptual distinctions among screening, monitoring and collection of loans. However, virtually no empirical studies have explored whether these tools of risk management are employed as net substitutes or as net complements. This paper finds evidence that, across the US banking industry, screening and monitoring behave as net substitutes but collection is complementary to screening and monitoring. A subset of low-risk banks suggests that best practices may involve net substitutability between each pair of these tools and, further, that any weakness in screening is fully offset by strength in monitoring and vice versa.