Enhancing Credit Reporting: State’s Role & Policy Implications

1. Global Financial Development Report (GFDR) Seminar Credit Reporting: What Role for the State? Miriam Bruhn (DECFP), SubikaFarazi (FPDCE) Martin Kanz (FPDCE)

2. Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Introduction • Why credit information matters • Why share credit information? • Risk-management and prudential regulation asymmetric information • 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)

3. Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Introduction • 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)

4. Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Introduction • Today How 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

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

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

7. The role of the state Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 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 • Regulator • Promoter • 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

8. Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • 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?

9. 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

10. Institutional Participation in Credit Reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • Different ways of measuring the coverage of the credit reporting system • Financial stability: volume of credit listed • Financial access: number of individuals covered

11. Institutional Participation in Credit Reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • 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

12. Depth of Credit Information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • 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

13. Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications b= -.48, R2=.12

14. Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications b= -.47, R2=.10

15. Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications b= -.48, R2=.12

16. 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

17. Robustness check: Instrumental variables strategy Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • 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

18. Bank concentration and the reach of credit reporting institutions Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • Higher bank concentration is associated with a lower volume of credit listed in • the credit bureau

19. Bank concentration and the quality of collectedcredit information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • Higher bank concentration is associated with a lower quality of the information • collected by the credit bureau

20. 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

21. Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Registries and bureaus: • Some anecdotal evidence of crowding out Bosnia and Herzegovina: public registry has no cutoff Source: Doing Business and Mylenko 2011

22. Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • Evidence suggests credit registries may crowd out credit bureaus

23. Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • But: existence of a registry may also help break banks’ information monopoly

24. Policy implications Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting 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

25. Additional research Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications • Would like to study how different types of government interventions can promote the emergence of a private credit bureau when bank concentration is high • Regulation • Mandatory information sharing • Currently do not have good cross-country data on credit information regulation… • …suggestions for data sources and additional research questions?