Credit Reporting: What Role for the State?

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Credit Reporting: What Role for the State?

Miriam Bruhn (DECFP), Subika Farazi (FPDCE)Martin Kanz (FPDCE)

Global Financial Development Report (GFDR) Seminar

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• Why credit information matters

– Why share credit information?(i) Risk-management and prudential regulation

asymmetric information(ii) Promotion of credit discipline moral hazard

• Credit information and the crisis

– New focus on credit information sharing for risk-management and prudential regulation

– Need for comprehensive credit reporting. Identify barriers to the entry of smaller players, non-regulated financial institutions(important rapid growth of consumer finance in emerging markets)

Introduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

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• Evidence on the real effects of credit reporting• Reduced default risk, lower interest rates (Padilla and Pagano, 2000) • Improved financial access (Galindo and Micco, 2010, Brown et al., 2009,

Love and Mylenko, 2003, and Galindo and Schiantarelli, 2003)• Improved stability of banking sector (Houston et al., 2010, Simovic, 2009) especially important in rapidly growing consumer finance markets

• Credit reporting and financial access• Reputational collateral for marginal borrowers (Miller, 2003)• Inclusion of non-regulated lenders (NBFIs, MFIs)


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• TodayHow is the performance of credit reporting institutions affected by the degree of competition and concentration in the banking sector?

• Policy implications: what role for the state?

– Transparency in credit reporting is closely linked to bank structure

– The state can play a useful role overcoming market failures and coordination problems arising from bank concentration

– Smart regulation needs to provide incentives for transparency where the market does not provide them (increasing social returns to scale)

-- Where registries and bureaus coexist their roles should be distinct and non- overlapping to realize economies of scale to avoid crowding out-- Support extension of credit reporting to non-regulated institutions, lower bar-- Set and monitor standards for the type and quality of information provided


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1. Introduction-Why credit information matters

2. The challenge of building transparent credit reporting systems-When and why the market may not do it-Bank concentration and credit reporting

-What role for governments in credit reporting?

3. Empirical overview- The nature and reach of credit reporting systems

- Bank concentration and credit reporting

4. New Evidence

5. Policy implications

Roadmap Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

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• Monopoly rents in the market for credit information– Banks (especially large banks) can capture monopoly rents and

prevent entry by not sharing information– Increasing social returns of credit information sharing (Japelli and

Pagano, 1993, 2002)– …but decreasing private returns of credit information sharing– Coordination problems in information sharing among private lenders

• Implications– Mere existence of credit reporting institutions may not be enough;

underlying bank concentration matters (closed user groups etc)– Especially important barrier for the extension of credit reporting to

non-regulated/nontraditional lenders such as MFIs and NBFCs

Problems in credit information sharing Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

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The role of the state

• What role for the state?

– Public good character of credit information sharing may justify involvement of the state

• Role of the state(i) Regulator(ii) Promoter(iii) Operator of credit information systems

• What should be the objective?

– Fix market failures (coordination problems among private lenders)– Realize economies of scale where the market does not provide the right incentives

(lower barriers of entry for smaller players NBFCs, MFIs)– Set data quality and reporting standards

The role of the state Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

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• How does bank concentration affect credit reporting?

(i) Emergence of credit reporting institutions(ii) Institutional participation in credit reporting(iii) Extent of information collected and distributed

• Can state involvement help?• Are there complementarities between public and private credit reporting?

Countries withlow bank concentration

Countries with high bank concentration

Credit Registry? .56 .37

Credit Bureau? .80 .39

Credit bureau or registry? .92 .53

Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

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Institutional Participation in Credit Reporting

Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

• Large variation in type of credit reporting institutions across regions• Legal origin and credit institutions: Anglo-Saxon countries typically stronger creditor rights, less state involvement

020

4060

80

by Type and RegionCredit Reporting Institutions

Credit bureau Credit registry

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• Different ways of measuring the coverage of the credit reporting system• Financial stability: volume of credit listed• Financial access: number of individuals covered

020

4060

8010

0

as % of GDPTotal Credit Listed

Credit listed in largest bureau Credit listed in credit registry

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Functional Differentiation

• Private bureaus collect more information from non-bank/non-regulated lenders• Potential limitations of registry for risk-management in emerging markets with large NBFI share• Strong case for private bureau if target is incorporation of MFIs, NBFIs

SSA

SA

OECD

MENA

LAC

ECA

EAP

Who Provides Information to Credit Bureaus?

Banks NBFCs MFIs

SSA

SA

OECD

MENA

LAC

ECA

EAP

Who Provides Information to Credit Registries?

Banks NBFCs MFIs

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Depth of Credit Information


It’s not just ownership that matters…

• Variation in the type and quality of information collected• Bureaus do more active monitoring…• …and collect more repayment information

SSA

SA

OECD

MENA

LAC

ECA

EAP

Credit BureausInformation Collected

Personal Loan Repayment

SSA

SA

OECD

MENA

LAC

ECA

EAP

Credit RegistriesInformation Collected

Personal Loan Repayment

13

b= -.48, R2=.12

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Information Distributed


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Pr[Credit Registry]=1 Pr[Credit Bureau]=1

Probit Probit Probit Probit Probit Probit Probit Probit

Bank concentration -0.312 -0.204 -0.191 0.076 -0.547** -0.502** -0.457** -0.529***(0.220) (0.230) (0.275) (0.299) (0.226) (0.233) (0.203) (0.200)

Per capita GDP -0.041 -0.030 -0.018 -0.053 0.037 0.044 0.070** 0.088**(0.037) (0.037) (0.040) (0.053) (0.033) (0.032) (0.034) (0.038)

Private Credit/GDP -0.003* -0.002* -0.002 -0.002 0.002* 0.002 0.002 0.001(0.001) (0.001) (0.001) (0.002) (0.001) (0.001) (0.002) (0.002)

Contract enforcement 0.131 0.152 0.027 -0.076 -0.104 -0.175(0.106) (0.118) (0.133) (0.093) (0.096) (0.111)

Creditor rights -0.042 0.044 0.025 0.012(0.042) (0.053) (0.036) (0.041)

French legal origin 0.601*** -0.211**(0.098) (0.106)

German legal origin 0.348*** -0.331(0.079) (0.211)

Transition legal origin 0.036 -0.396* (0.193) (0.234)Number of observations 135 132 115 111 135 132 115 111

R-squared 0.070 0.072 0.072 0.281 0.139 0.141 0.249 0.286

Note: *** p<0.01, ** p<0.05, * p<0.1

Bank concentration and the emergence of credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

• Going from the 25% to the 75% percentile in bank concentration (from 56% to 89%) is associated with a 17 percentage point lower likelihood of having a credit bureau• Countries with French and German legal origin are more likely to have a credit registry, but less likely to have a credit bureau, compared to countries with British legal origin

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• Results remain unchanged when using an instrumental variables strategy with the following instruments for bank concentration and institutions (i.e. creditor rights, contract enforcement)– Banking applications denied– Legal origins– Region

Second stage

First stage

iiii nsinstitutioionconcentraty i21 X'

ii regionlegoriappdeniedionconcentrat i3211 X'_

iiiii regionappdeniedlegornsinstitutio i3212 X'

Robustness check: Instrumental variables strategy


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Credit listed/GDP, credit registry Credit listed/GDP, credit bureau OLS OLS OLS OLS OLS OLS OLS OLS

Bank concentration -0.024 0.060 0.174 0.392 -0.517* -0.444* -0.368 -0.383(0.152) (0.163) (0.217) (0.245) (0.289) (0.260) (0.293) (0.346)

Per capita GDP 0.049 0.057* 0.070* 0.068* 0.032 0.042 0.060 0.093(0.031) (0.032) (0.038) (0.039) (0.056) (0.057) (0.071) (0.090)

Private credit/GDP 0.002 0.002 0.002 0.002 -0.001 -0.001 -0.002 -0.002(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.003)

Contract enforcement 0.086 0.136 0.097 0.173 0.230* 0.252*(0.078) (0.090) (0.094) (0.107) (0.124) (0.149)

Creditor rights 0.028 0.049 0.086* 0.056(0.036) (0.037) (0.047) (0.040)

French legal origin 0.319*** -0.262(0.113) (0.223)

German legal origin 0.515** -0.384(0.240) (0.236)

Scandinavian legal origin -0.343** -0.300

(0.159) (0.307)Transition legal origin 0.150 -0.118

(0.116) (0.197)Constant -0.189 -0.853 -1.390* -1.545* 0.295 -0.946 -1.599* -1.704* (0.242) (0.584) (0.763) (0.797) (0.429) (0.646) (0.970) (1.025)

Number of observations 130 127 110 110 101 99 85 85

Adjusted R2 0.045 0.047 0.074 0.173 0.023 0.037 0.063 0.079Note: *** p<0.01, ** p<0.05, * p<0.1

Bank concentration and the reach of credit reporting institutions


• Higher bank concentration is associated with a lower volume of credit listed in the credit bureau

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Credit registry Credit bureau

Overall Personal Loan Repayment Overall Personal Loan Repayment OLS OLS OLS OLS OLS OLS OLS OLS

Bank concentration -0.012 -0.042 0.028 -0.098 -0.378* -0.420* -0.355 -0.534(0.134) (0.138) (0.171) (0.178) (0.182) (0.176) (0.209) (0.228)

Contract enforcement -0.060 -0.037* -0.075* -0.081* -0.007 -0.050 0.008 -0.035(0.057) (0.059) (0.068) (0.073) (0.096) (0.094) (0.108) (0.134)

Creditor rights 0.020 0.009 0.034 0.033 0.047 0.048 0.030 0.073(0.020) (0.021) (0.026) (0.026) (0.030) (0.029) (0.031) (0.040)

Per capita GDP -0.032 -0.045 -0.021 -0.047 0.062 0.037 0.051* 0.106*(0.022) (0.023) (0.026) (0.028) (0.027) (0.026) (0.035) (0.034)

Private credit/GDP -0.000 -0.000 -0.001 0.000 -0.002 -0.002 -0.002* -0.003(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)

Crisis 1970-2000 -0.086 -0.118 -0.072 -0.099*** -0.037 -0.070 -0.001 -0.014(0.055) (0.056) (0.065) (0.077) (0.064) (0.063) (0.075) (0.077)

French legal origin 0.268 0.264 0.311 0.355** -0.046 -0.049 -0.017 -0.066(0.057) (0.064) (0.070) (0.069) (0.074) (0.071) (0.087) (0.097)

German legal origin 0.199 0.206 0.253 0.264** 0.032 -0.023 0.148 0.056(0.074) (0.070) (0.089) (0.110) (0.095) (0.088) (0.116) (0.128)

Scandinavian legal origin -0.024 0.012 -0.080 0.035 -0.266 -0.106 -0.318 -0.445(0.087) (0.088) (0.108) (0.115) (0.124) (0.151) (0.118) (0.157)

Transition legal origin 0.048 0.013 0.054* 0.130* 0.019 -0.100 0.106* -0.022*(0.114) (0.116) (0.148) (0.147) (0.149) (0.140) (0.172) (0.180)

Constant 0.762 0.809 0.775 0.999 0.217 0.714 0.163 0.287 (0.456) (0.458) (0.550) (0.616) (0.803) (0.761) (0.926) (1.085)Number of observations 115 115 115 115 107 107 103 107Adjusted R2 0.151 0.180 0.143 0.119 0.115 0.077 0.065 0.196

Note: *** p<0.01, ** p<0.05, * p<0.1

Bank concentration and the quality of collected credit information


• Higher bank concentration is associated with a lower quality of the information collected by the credit bureau

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Credit registry Credit bureau

Overall Personal Loan Repayment Overall Personal Loan Repayment

OLS OLS OLS OLS OLS OLS OLS OLS

Bank concentration -0.104 -0.131 -0.071 -0.160 -0.368* -0.383* -0.391 -0.509(0.123) (0.135) (0.146) (0.167) (0.169) (0.185) (0.195) (0.225)

Contract enforcement -0.053 -0.041* -0.062* -0.056* 0.010 -0.068 0.037 -0.013(0.057) (0.057) (0.062) (0.073) (0.090) (0.094) (0.104) (0.132)

Creditor rights 0.029 0.021 0.040 0.026 0.050 0.046 0.036 0.082(0.020) (0.021) (0.024) (0.025) (0.028) (0.029) (0.030) (0.040)

Per capita GDP -0.031 -0.057 -0.016 -0.041 0.059 0.038 0.049* 0.104*(0.021) (0.022) (0.023) (0.026) (0.025) (0.027) (0.033) (0.034)

Private credit/GDP -0.000 -0.000 -0.001 0.000 -0.002 -0.002 -0.002* -0.003(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)

Crisis 1970-2000 -0.087 -0.125 -0.066 -0.107*** -0.023 -0.050 0.016 -0.012(0.052) (0.056) (0.059) (0.075) (0.060) (0.069) (0.069) (0.075)

French legal origin 0.244 0.264 0.237 0.313** -0.061 -0.066 -0.033 -0.074(0.058) (0.066) (0.067) (0.069) (0.069) (0.073) (0.080) (0.095)

German legal origin 0.184 0.202 0.191 0.252** 0.009 -0.029 0.143 0.030(0.071) (0.070) (0.079) (0.105) (0.090) (0.092) (0.115) (0.129)

Scandinavian legal origin -0.003 0.058 -0.064 0.039 -0.275 -0.111 -0.274 -0.469(0.088) (0.096) (0.099) (0.111) (0.111) (0.133) (0.114) (0.148)

Transition legal origin 0.041 0.023 0.020* 0.127* 0.051 -0.129 0.157* 0.034*(0.113) (0.120) (0.129) (0.140) (0.145) (0.139) (0.166) (0.185)

Constant 0.761 0.943 0.703 0.861 0.079 0.788 -0.029 0.111 (0.450) (0.447) (0.501) (0.606) (0.746) (0.780) (0.862) (1.061)Number of observations 115 115 115 115 107 104 103 107Adjusted R2 0.129 0.171 0.098 0.093 0.138 0.068 0.097 0.203Note: *** p<0.01, ** p<0.05, * p<0.1

Bank concentration and the quality of distributed credit information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications

• Higher bank concentration is associated with a lower quality of the information distributed by the credit bureau

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Registries and bureaus:

Credit registries and bureaus: complements or substitutes?


• Some anecdotal evidence of crowding out

Bosnia and Herzegovina: public registry has no cutoff

2003 2004 2005 2006 2007 2008 2009 20100

10

20

30

40

50

60

70

80

Public registry coverage (% of adults) Private bureau coverage (% of adults)

Source: Doing Business and Mylenko 2011

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Credit bureau

Exists=1 Credit listed/GDP 2005-2010

Institutional participation

Information collected

Probit OLS OLS OLS

Registry=1 -1.048** -0.249* -0.085 -0.146**(0.411) (0.127) (0.059) (0.067)

Bank concentration -2.191** -0.353 -0.406** -0.334**(0.975) (0.336) (0.168) (0.168)

Contract enforcement -0.635 0.264* 0.051 0.020(0.509) (0.150) (0.067) (0.092)

Creditor rights 0.102 0.071* 0.025 0.054**(0.188) (0.042) (0.028) (0.028)

Per cpita GDP 0.351** 0.081 0.065*** 0.058**(0.147) (0.087) (0.022) (0.027)

Credit/GDP 0.004 -0.002 -0.000 -0.002**(0.008) (0.003) (0.001) (0.001)

French legal origin -0.298 -0.127 0.027 0.026(0.475) (0.180) (0.071) (0.081)

German legal origin -0.528 -0.285 -0.098 0.085(0.635) (0.201) (0.087) (0.096)

Transition legal origin -1.066* -0.095 0.035 0.033(0.646) (0.198) (0.100) (0.141)

Scandinavian legal origin -0.345 -0.188 -0.299**(0.305) (0.128) (0.123)

Constant 4.560 -1.660 -0.214 0.058 (4.001) (1.067) (0.566) (0.749)Number of observations 111 85 107 107R2 0.328 0.216 0.289 0.232note: *** p<0.01, ** p<0.05, * p<0.1

• Evidence suggests credit registries may crowd out credit bureaus

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Credit bureau

Exists=1 Credit listed/GDP 2005-2010

Institutional participation

Information collected

Probit OLS OLS OLS

RegistryXConcentration 0.570 1.623** -0.717** -0.061

(0.428) (0.751) (0.282) (0.292)

Registry=1 -0.517* -1.302** 0.391* -0.106

(0.291) (0.579) (0.202) (0.203)

Bank concentration -0.862** -1.297* 0.014 -0.299

(0.370) (0.682) (0.247) (0.215)

Contract enforcement -0.108 0.274* 0.035 0.019

(0.092) (0.148) (0.064) (0.093)

Creditor rights 0.021 0.083* 0.018 0.053*

(0.033) (0.043) (0.027) (0.028)

Per capita GDP 0.065* 0.094 0.058** 0.057**

(0.035) (0.085) (0.023) (0.028)

Credit/GDP 0.001 -0.003 0.000 -0.002**

(0.001) (0.003) (0.001) (0.001)

French legal origin -0.077 -0.187 0.043 0.028

(0.093) (0.183) (0.072) (0.083)

German legal origin -0.166 -0.332 -0.079 0.086

(0.200) (0.214) (0.081) (0.098)

Transition legal origin -0.381 -0.192 0.066 0.036

(0.247) (0.218) (0.105) (0.144)

Scandinavian legal origin -0.167 -0.270** -0.306**

(0.293) (0.135) (0.121)

Number of observations 111 85 107 107

R2 0.253 0.291 0.339 0.232

note: *** p<0.01, ** p<0.05, * p<0.1

• But: existence of a registry may also help break banks’ information monopoly

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Policy implications


• Transparency in credit reporting matters– Financial access and inclusion– Financial stability and prudential regulation

• Degree of state involvement varies– …but it’s not only the ownership of credit reporting systems that matters

• Promoting credit information cannot be isolated from credit market competition more broadly

• Bank concentration also determines quality of credit reporting– Smart regulation needs to understand concentration of the banking sector– Private credit reporting may not emerge without state intervention if bank

concentration is high

• Country examples: market failure, capture of credit reporting systems by small number of banks if bank competition not taken into account

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Additional research


• Would like to study how different types of government interventions can promote the emergence of a private credit bureau when bank concentration is high(i) Regulation(ii) Mandatory information sharing

• Currently do not have good cross-country data on credit information regulation…

• …suggestions for data sources and additional research questions?

Credit Reporting: What Role for the State?

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