Credit Reporting under the Shadow of Big Banks

Credit information sharing has been shown to have several benefits for the financial system. Reliable credit information can address the fundamental problem of asymmetric information between borrowers and lenders, it can alter borrowers’ behavior countering moral hazard, and improving repayment rates, and it can place banks in a better position to assess default risk, counter adverse selection, and monitor institutional exposures to credit risk. Perhaps most importantly, credit reporting can allow borrowers to build a credit history and to use a documented track record of responsible borrowing and repayment as "reputational collateral" to access credit outside established lending relationships. In addition, financial regulators can draw on credit reporting systems to understand the credit risk faced by financial institutions and systemically important borrowers, to define capital provisioning requirements, and to conduct essential oversight functions.

Despite the numerous benefits of information sharing for credit market efficiency, credit reporting institutions do not always emerge spontaneously. The Doing Business dataset shows that 26 percent of countries do not have any credit reporting institution at all (figure 1). Low and middle income countries have a relatively higher presence of credit registries while credit bureaus are more common in high income countries.

One reason why a credit bureau may not emerge voluntarily is that the private returns to information sharing are not necessarily aligned with its public returns. A paper that I coauthored with Miriam Bruhn and Martin Kanz, examines two features of the banking market — competition and concentration — that can influence private returns to joining a credit bureau and that can thus affect the probability of a credit bureau emerging. Our paper is the first to empirically test the relationship between banking competition and the voluntary emergence of a credit bureau with cross-country data.

Our results show that countries with lower entry barriers into the banking market (that is, a greater threat of competition) are less likely to have a credit bureau, presumably because banks are less willing to share proprietary information when the threat of market entry is high. However, we also show that where a credit bureau exists, the absence of competitive pressures is associated with less depth and transparency of the credit information that is made available by lenders.

Additionally, a credit bureau is significantly less likely to emerge in economies characterized by a high degree of bank concentration. We argue that the disincentive for information sharing is particularly relevant for very large banks as they stand to lose more monopoly rents from sharing their extensive information with smaller players. This implies that barriers to credit information sharing may be particularly pronounced in markets characterized by a high degree of bank concentration.

In contrast, we find no significant relationship between bank competition or concentration and the emergence of a public credit registry. This result is not surprising since participation in a registry is mandatory and banks’ incentives are only relevant for voluntary information sharing.

Our results highlight that policies designed to promote the voluntary exchange of credit information need to take into account banks’ incentives to extract monopoly rents from proprietary credit information. In addition, policymakers who determine entry barriers into the banking market should be aware of the side-effects that these barriers can have on voluntary information sharing.