Credit Reporting Systems Worldwide ???????

1
Credit Reporting Systems Worldwide???????

• Seminar on Credit Reporting System and Chinas
  Economy ?????????? The Peoples Bank of China
  and the World Bank?????????????
• Margaret Miller
• Senior Economist,World Bank
• ??????????
• Shanghai, China
• May 18, 2004
• ????
• 2004?5?18?

2
World Bank Work on Credit Reporting Systems
???????????????

• Legal reform ???????
• bank secrecy, privacy and data protection,
  consumer rights ???????????????,?????
• Regulatory Reform???????
• Establishment and enhancement of credit
  bureaus?????????
• special emphasis on SME and micro-finance credit
  reporting ???????????????
• Public Database Modernization?????????
• Education and Outreach ??????
• - consumers, judiciary ??,????
• http//econ.worldbank.org/programs/credit_reportin
  g/

3
Main messages of todays presentation????????

1. Value credit reports greatly reduce the time
   and cost of providing credit ??-??????????????????
   ??
2. Public credit registries and private credit
   reporting firms are not substitutes they can
   complement one another ????????????????????????,??
   ???????

4
Main messages of todays presentation????????

• 3. Maximize the completeness of credit histories,
  data available to open user group
  ????????????????????????

5
The credit reporting industry is in transition,
with many new entrants??????????,???????

• The median age of private registries in the
  survey sample is 10 years. Thirty percent of the
  private registries were established since 1995.
• ????????,???????????????10??30?????????1995????
• Latin America led other regions in 1990s in
  establishment of public credit registries.
• ?????????????,?????90???????????

6
The credit reporting industry is in transition,
with many new entrants??????????,???????

• Legal issues contributed to the creation of the
  public credit registry in approximately half of
  the countries and legal issues are still
  pending in about half the countries with public
  registries.
• ???????,??????????????????,??,????????????????,???
  ?????????

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Full Benefits of Credit Reporting are Absent in
Most Countries??????????????

• Wide variance in reporting environments
  worldwide???????????
• Closed-group reporting misses important
  experience from other industry sectors????????????
  ??????????
• Privacy laws restrict positive reporting in many
  countries?????????????????
• Established lenders often distrust a move to
  full-file reporting consequently may support
  strong privacy protections for
  consumers??????????????????-?????????????????
• Source Michael Staten, Credit Research Center,
  Georgetown University

9
Maximizing Economic Benefits from Information
Sharing ???????????????
???????????????
????????
????????
?????????????????
???????
?????????
???????????
10
Empirical Evidence of the Importance of Credit
Registries for Credit Markets????????????????

• Jappelli Pagano (1999)
• relationship between registries characteristics
  (age, type of data) and credit / GNP
  ??????(??,????)?????/GNP?????
• Barron Staten (2000)
• greater availability of information reduces
  default rates, improves access to credit
  ?????????????,??????
• Kallberg Udell (2001)
• data from DB has greater predictive power than
  firm financial statements DB?????????????????
• Galindo Miller (2001)
• Firms in countries with better credit information
  are less credit constrained rely less on
  internal funds ????????????????????,?????????

11
Banks Cost and time savings from credit reports
and credit scoring ????????????????????

• Some case studies ??????
• A bank in Canada processing time decreased from
  9 days to 3 days, in 18 months since scoring was
  implemented. ????????????????18???,?????9????3??
• A bank in the Netherlands processing time
  decreased from 8-10 hours to 15 minutes for
  existing clients and 45 minutes for new
  clients.?????????????????8-10?????15??,????45??
• A bank in the US average cost of processing a
  small business loan decreased from 250 to 100
  after implementing scoring system.???????????????
  ???,?????????????250???100

12
Cost and time savings from credit reports and
credit scoring ???????????????????

• Cost of use of consumer credit scoring models
  between 0.50 and 5.00 per loan?????????????0.5?
  5.0??(????)
• Cost of use of small business credit scoring
  models between 1.50 and 10.00 per
  loan?????????????1.5?10.0??(????)
• Processing time virtually instantaneous
  ?????????
• Typical loan size for small business scoring
  models 20,000 to 100,000 ????????????????20,000
  ? 100,000

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Survey of Latin American Banks -importance
attached to credit reporting?????? ????????
14
Percentage of Banks which consult a credit
registry for small business loans????????????????
????
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Banks Using information from credit registry
helps reduce default rates???????????????
Large Bank Default Rate (41 reduction)??????(??41
)
Small Bank Default Rate (78 reduction)??????(??7
8)
2.42
2.22
1.31
0.52
Model with
Information from
Model with
Information from
individual bank
individual bank
Registry ?????????
Registry ?????????
information only ????????????
information only ????????????
Estimates are based on information on large loans
from public credit registry in Argentina for a
selected large and a small bank. Graph represents
predicted default rates at 40 approval rate.
Based on Majnoni, Miller, Mylenko and Powell
(2003) Public Credit Information Systems
Evaluating Available Information, World Bank
??????????????????????????????????????????????40?
??Miller, Mylenko, Powell (2003)
???????????????
16
Firms Private credit registries reduce financing
constraints.Estimates based on data on 5000
firms in 51 countries ???????????????????51???500
0??????????
of small firms reporting high financing
constraints???????????????
Probability of obtaining a bank loan for a small
firm?????????????
40
27
Without credit
With credit
Without credit
With credit
Bureau ????
Bureau ????
Bureau ????
Bureau ????
Source Love and Mylenko (2003), full text
available at http//econ.worldbank.org/programs/cr
edit_reporting/
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• Results of World Bank global
• survey of public and private
• credit registries
• ???????????????????????

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A few words on terminology??????

• Private credit reporting or private credit
  information registry
• ???????????????
• Public credit registry (PCR)
• ??????
• Credit reporting system
• ??????

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Elements of a Credit Reporting System?????????

• private credit registries, including chambers of
  commerce, and banking associations
  ????????,?????????
• the public credit registry, if one exists
  ????????
• the legal framework for credit reporting
  ?????????
• the legal framework for privacy, as it relates to
  this activity
• ?????????,?????????????

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Elements of a Credit Reporting System?????????

• the regulatory framework for credit reporting
• ?????????
• the characteristics of other pertinent borrower
  data available in the economy
• ????????????????
• the use of credit data in the economy, by
  financial intermediaries and others
• ???????????????????
• the cultural context for credit reporting
• ?????????

21
Private sector led credit reporting
systems??????

• In most countries, banks and other lenders rely
  primarily on private registries for data, even if
  a public registry exists??????,????????,??????????
  ???????????
• Countries with only private sector credit
  reporting include the United States, Canada,
  United Kingdom and Nordic countries???????????????
  ?????
• U.S. has approximately 240 credit bureaus, most
  local or regional in scope, which provide data,
  in turn, to the big three credit bureaus
  (Equifax, Experian and Trans Union)????240????,???
  ????????,??????3????????
• Government role in these countries focused on
  protecting the consumer???????????????

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Institutional Arrangements for Private Credit
Registries????????????
23
Institutional Arrangements for Private Credit
Registries????????????
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Public Credit Registries (PCRs)??????

• Seven of the 15 European Union countries have
  public credit registries 15???????7??????????
• Austria, Belgium, France, Germany, Italy,
• Portugal and Spain???,???,??,??,???,???,???
• All EU countries, with the exception of France,
  also have private credit reporting
  firms??????????????????
• More than 60 countries have public registries
  60????????????

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Public Credit Registries (PCRs)????????

• Government motivation for creating PCRs
• ???????????????
• To promote exchange of credit information in the
  financial system???????????
• To improve private credit reporting activities
• ????????
• To overcome legal problems with sharing credit
  information?????????????
• To strengthen supervision of regulated financial
  institutions ??????????
• For economic analysis (less important)??????(????)

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Public vs. Private Credit Registries
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Who submits information to public and private
registries?????????????????
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Firm data collected by public and private
registries??????????????
29
Distribution of data by public and private
registries??????????????
30
Consumer AttentionComparing Private and Public
Registries??????????????????
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Emerging elements of good practice Public Credit
Registry (PCR)????????????????(PCR)

• Clear objectives for PCR ?????????????
• consult with financial institutions, private
  credit reporting firms ??????????????????
• Complement, not compete, with private firms
• ???????, ??????
• Focus on larger loan sizes????????????
• Provide customer service if data is distributed
  to financial system ??????????,??????

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Information in credit reports ?????????

• Credit reports reduce problems of asymmetric
  information adverse selection and moral hazard
• ??????????????-????????
• The heart of the credit report is the detailed
  payment history it provides?????????????????
• Positive payment history empowers good borrowers,
  creates reputation collateral?????????????????????
  ,???????
• Negative payment data encourages honoring
  obligations ?????????????

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Complete payment histories ???????

• Maintain data for a reasonable time frame
• 5 years minimum????????-??5????
• Do not delete data on late payments or defaults
  when debt repaid?????????????
• Do not provide amnesty for bad payment history
• ????????????
• Access to detailed information preferable
• ???????????????
• loans described individually, not aggregates
• ????????,??????
• institutions providing credit identified
• ???????????

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Complete records not fragmented by sector
???????????

• Open system, not closed network
• ?????, ???????
• Avoid fragmentation of data among sectors
• ??????????
• Integrity and transparency are paramount
• (??)?????????????
• special standing of any group, including owners
  or government, will discourage participation
  ????????????????
• Reciprocity not necessary ????
• Restrictions to prevent cherry-picking???????,?
  ??????
• Distribution reflects privacy considerations
• ?????????????

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Barron-Staten results on predictive power of
positive information?????????????
36
Barron-Staten results on predictive power of
positive information?????????????
37
Barron-Staten on importance of non-fragmented
credit data??????????
38
Barron-Staten on importance of non-fragmented
credit data??????????
39

• International experiences with government
  involvement in credit reporting
• ?????????????

40
Emerging elements of good practice Credit
reporting and bank supervision?????????????????

• Supervisors include financial institutions use
  of credit information as part of inspections
• ??????????????????????????
• Require publicly (government) owned financial
  institutions to provide data to legitimate credit
  reporting firms, associations
• ???????(?????)?????????????????????
• Encourage all financial institutions to
  participate in credit reporting
• ????????????????
• Data from public credit registry may be useful in
  meeting New Basel Capital Agreement
• ???????????????????????????????

41
Regulatory Authorities Powers Responsibilities
Over Credit Reporting Firms?????????????????
42
Consumer Rights Regarding Personal
Data?????????????