Information Sharing in Credit Markets: The European Experience
When lenders screen loan applicants and price loans to them, they need information to evaluate their credit worthiness. This information can originate from three sources. First, it may be already in possession of the bank, which has acquired it over the course of a long-standing relationship with that specific customer. Second, the bank may seek the information directly, by interviewing the applicant, visiting his or her business before granting the loan or gathering data from public records. If the bank operates on a large scale, it can use statistical risk management techniques to process the data it already owns or has collected in order to take decisions about loan granting and pricing. A third way to get information on a credit seeker is to obtain it from lenders who have already patronized that individual. Getting information from other lenders will generally require a reciprocal obligation to provide one’s own information. In other words, it requires an information sharing arrangement between lenders.
The arrangement that rules the exchange of credit information between lenders can be voluntary or imposed by a public authority. When it occurs spontaneously, the exchange of information is effected by information brokers, known as credit bureaus. They operate on the principle of reciprocity, collecting, filing and distributing the information supplied voluntarily by their members. In several European countries a great deal of informational exchange also occurs via public credit registers. These are generally managed by central banks, with compulsory reporting of data on borrowers, which are then processed and returned to lenders.
In this paper, we describe the operation of credit bureaus and public credit registers in Europe and extract potential lessons for upgrading credit registers in other countries. The evidence that we report is based on questionnaires directed to private credit bureaus and central banks, on direct interviews and on official sources.
The paper is divided in three substantive sections. In Section 2 we describe the main features of European credit bureaus. Section 3 extends the analysis to public credit registers, and explains in which respects they differ from private credit bureaus. Both sections document that borrowers’ coverage and the type of data exchanged vary considerably over time and between European countries. Section 4 highlights some lessons that can be drawn from the European experience for the effective design of information sharing institutions. First, European privacy protection laws affect greatly the amount and type of information shared between lenders. Second, credit bureaus have a tendency to originate spontaneously from local lenders. Third, in Europe as elsewhere there are powerful forces pushing towards consolidation of the credit bureaus industry. While this process reflects the “natural monopoly” feature of the industry, its pace has been accelerated also by technological factors and, especially within Europe, by the increasing international integration of national capital markets.
Three annexes complete the paper, reporting detailed descriptions of the operation private credit bureaus in European countries (Annex 1), the main features of European public credit registers, and privacy protection restrictions to the activity of credit bureaus and public credit registers in Europe (Annex 3). The questionnaires sent to private credit bureaus and central banks and used to elicit the information reported in this paper are reported in Annex 4 and Annex 5, respectively.
contents
1. Introduction
2. Private information sharing arrangements
- 2.1. Consumer credit and small business
2.2. Corporate loans
3. Public information sharing arrangements
- 3.1. Main features of European public credit registers
3.2. Towards a European public credit register?
4. What can we learn from the European experience?
- 4.1. Privacy protection can limit the exchange of information
4.2. Information sharing originates from localized lenders
4.3. Forces pushing towards the consolidation of European credit bureaus
5. Conclusions
Figures
- Example of a report issued by a credit bureau
Example of a report issued by a public credit register
Tables
- 1. Credit bureaus in Europe
2. Public credit registers in Europe
3. Characteristics of public credit registers in Europe
Annex 1: Description of private credit bureaus in Europe
Annex 2: Description of public credit registers in Europe
Annex 3: Privacy protection restrictions to the activity of credit bureaus and public
credit registers
Annex 4: Questionnaire directed to private credit bureaus
Annex 5: Questionnaire directed to central banks
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