Credit registries reduce competition between banks

Private credit registries are an increasingly common way for banks to share information about borrowers - and a helpful tool for reducing losses on unprofitable borrowers. Jan Bouckaert (of the University of Antwerp) and Hans Degryse show that they also reduce competition between banks and raise the cost of credit for good borrowers who have suffered bad luck. The disclosure of information is often presented as a solution to prevent bad borrowers from making markets function properly. But as this study shows, that is not the only story: banks disclose information about their borrowers' repayment history to reduce entry into their market niche. Credit information exchange between banks, common in all Western countries, often occurs through public and private credit bureaus. While the former are mainly organized on reciprocal basis around the central bank, the private registries are initiated voluntarily. More than 50% of these do not require lenders or others to provide data to get access. An important reason why incumbent banks voluntarily disclose their borrowers' repayment history is to reduce the extent of entry by new competitors. Disclosure of repayment histories prevents entry into the segment of good borrowers with bad luck whose repayment histories are pooled with unprofitable borrowers. As a result the incumbent enjoys monopoly rents on these good borrowers with bad luck, increasing its overall profits. While information disclosure is helpful to the banking industry to reduce the losses on unprofitable borrowers, it also dampens banking competition by locking in good borrowers with bad luck. 'Entry and Strategic Information Display in Credit Markets' by Jan Bouckaert and Hans Degryse is published in the July 2006 issue of the Economic Journal.