Private credit registries are an increasingly common way for banks to share information
about borrowers – and a helpful tool for reducing losses on unprofitable borrowers. But new
research by Professors Jan Bouckaert and Hans Degryse, published in the July 2006
Economic Journal, shows that they also reduce competition between banks and raise the
cost of credit for good borrowers who have suffered bad luck.
Banks disclose information about their borrowers’ repayment history to reduce entry into
their market niche. This disclosure of information is very often looked at as a solution to
prevent bad borrowers from making markets function properly. But as this study shows, that
is not the only story.
A recent World Bank survey points out that in 70 countries, credit information exchange
between lenders takes place. Exchange of information happens in all major Western
countries, and has been introduced in many countries that recently experienced financial
liberalisation. This observation illustrates the growing importance of borrower information
exchange between banks.
Credit information exchange between banks often occurs through public and private credit
bureaux. Public credit registries are mainly organised around the central bank. Private
registries in contrast are initiated voluntarily.
While access to data in public registries is often limited on the grounds of reciprocity, this
does not apply to private credit registries. More than 50% of the private credit registries do
not require lenders or others to provide data to get access. The World Bank survey
indicates that the voluntary release of credit information is an important empirical
observation.
An important reason why incumbent banks voluntarily disclose their borrowers’ repayment
history is to reduce the extent of entry by new competitors. In the absence of information on
repayment histories, new competitors will make loan offers whenever the average borrower
shows good investment opportunities.
Disclosure of repayment histories invites entry into the segment of successful borrowers
only. But it prevents entry into the segment of good borrowers with bad luck whose
repayment histories are pooled with unprofitable borrowers.
As a result the incumbent enjoys monopoly rents on these good borrowers with bad luck,
increasing its overall profits.
While information disclosure is helpful to the banking industry to reduce the losses on
unprofitable borrowers, it also dampens banking competition by locking in good borrowers
with bad luck.
ENDS
Notes for editors: ‘Entry and Strategic Information Display in Credit Markets’ by Jan
Bouckaert and Hans Degryse is published in the July 2006 issue of the Economic Journal.
Jan Bouckaert is at the University of Antwerp. Hans Degryse is at Tilburg University and
TILEC.
For further information: contact Jan Bouckaert via email: Jan.Bouckaert@ua.ac.be; Hans
Degryse via email: H.Degryse@uvt.nl; or Romesh Vaitilingam on 0117-983-9770 or 07768-
661095 (email: romesh@compuserve.com).