Information problems have long been at the fore of analyses of credit markets. Indeed, one rationale for banks is as institutions to gather information and establish relationships with borrowers in an effort to surmount these problems. A striking feature of banks is the plethora of services that they offer and the economies of scope between them. For example, accounts and payments’ services provide valuable data to the bank on the creditworthiness of clients as potential borrower.
A limited number of papers have focused on whether banks should share information. Jappelli and Pagano (1993), in a model with adverse selection, show that exchanging information on borrower type decreases default rates and reduces average interest rates. In a related paper, Padilla and Pagano (1997) show that information sharing among borrowers would lead to lower interest rates and increased lending. There is also a growing body of empirical evidence that suggests that the existence of credit information sharing is associated with deeper credit markets. Barron and Staten (2003), Kalberg and Udell (2003) and Cowan and de Gregorio (2003) all suggest there is value in the existence of private credit bureau reporting services.
However, it is not clear that banks will voluntarily share information even when it is in a broader social interest to do so. Jappelli and Pagano (1993) show conditions under which information sharing will and will not occur. Moreover, there is virtually no theoretical analysis regarding the organizational structure of the private credit bureau industry. As there are almost certainly increasing returns to scale in this industry, and hence there are likely to be market power, less than optimal service provision and higher than competitive pricing, an important question is whether there should be public sector intervention to enhance credit information sharing and, if so, what form that intervention should take.
In practice public intervention does indeed take place. First, private sector credit bureaus are frequently regulated. However, this regulation normally takes the form of monitoring privacy concerns and individual protection issues rather than attempting to enhance credit information per se. Monopoly pricing or other restrictive practices that might limit competition or service provision are generally the responsibility of competition authorities that have in practice rarely intervened in this specialized sector. The second form of intervention that has taken place is the direct (and frequently forced) provision of credit information sharing services by central banks or banking supervisors known as public credit registries (PCRs).
World Bank surveys have documented that PCRs exist in about 60 countries worldwide and more nations are planning to create them in the future. In countries with PCRs, supervised financial institutions are required to provide data on individual borrowers on a periodic basis, usually monthly. Core PCR data are information on the identity of borrowers, the size of any loans or credit lines outstanding with reporting institutions and their status. Status implies whether a loan is in good standing, past due, in default or other non-accrual status.
