Credit Reporting: What Role for the State? Miriam Bruhn (DECFP), Subika Farazi (FPDCE) Martin Kanz (FPDCE) 1 Global Financial Development Report (GFDR) Seminar 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 2 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)Introduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 3 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 providedIntroduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 4 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 implicationsRoadmap Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 5 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 6 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 7 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 with low bank concentration Countries with high bank concentration Credit Registry? Credit Bureau? Credit bureau or registry? Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 8 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 9 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 10 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 11 Depth of Credit Information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Its not just ownership that matters Variation in the type and quality of information collected Bureaus do more active monitoring and collect more repayment information 12 b= -.48, R 2 =.12 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 13 b= -.47, R 2 =.10 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 14 b= -.48, R 2 =.12 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 15 Pr[Credit Registry]=1Pr[Credit Bureau]=1 Probit Bank concentration **-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 **0.088** (0.037) (0.040)(0.053)(0.033)(0.032)(0.034)(0.038) Private Credit/GDP-0.003*-0.002* * (0.001) (0.002)(0.001) (0.002) Contract enforcement (0.106)(0.118)(0.133)(0.093)(0.096)(0.111) Creditor rights (0.042)(0.053)(0.036)(0.041) French legal origin0.601***-0.211** (0.098)(0.106) German legal origin0.348*** (0.079)(0.211) Transition legal origin * (0.193) (0.234) Number of observations R-squared Note: *** p