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Credit Reporting Systems Around the Globe
Policy Seminar
Inter-American Development Bank
Washington, D.C.
May 9, 2001
Margaret Miller, Senior Economist
Corporate Strategy Group
World Bank
Organization of today’s presentation
I. The state of the art in credit reporting - results of 1999-2000 World Bank survey
II. The importance of credit registries in financial markets - empirical evidence
III. Public policies to support credit reporting - emerging elements of “good practice”
IV. Conclusions
Elements of a Credit Reporting System
• the public credit registry, if one exists• private credit registries, including chambers of commerce, and
banking associations• the legal framework for credit reporting• the legal framework for privacy, as it relates to this activity• 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
I. Results of 1999-2000 World Bank survey of public and private credit registries
Survey sample by countryRegion Public CIR Private CIRNumber of obs by: Country Country Firms
Latin America 26 17 29Africa(includes 8 nations in BCEAO)
13 1 1
W. Europe 12 7 7E. Europe 4 6 8Asia Pacific 6 4 5Other 5 1 2TOTAL 66 36 52
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.
• Of the 29 private registries from Latin America, 13 were established since 1993.
• Latin America led all other regions in the 1990s in the establishment of public credit registries.
Public vs. Private Credit Registries
Feature Public PrivateSource ofinformation
Supervisedinstitutions
Varied sources
Participationmandatory?
Yes No
Positive Info? Yes In some cases
Borrowers assigneda rating?
Yes No
Minimum loan size In some countries No
Fee for service No charge orminimal charge
Yes
Institutional Arrangements for Private Credit Registries
Institutional Type Pros Cons
Private firm w/nobank ownership
All types of data,independence
No automaticaccess to data
Private firm w/ bankownership
All types of data,Special access tobank data
Independence maybe questioned
Bank association Access to bank dataIntegrity
Only bank data,only bank access
Chamber ofCommerce
Retail & non-bankdata, broad cover,historical record
No bank data,Limited funds formodernization
Commercial &Credit insurancefirms
In-depth data oncommercial sector
Limited coverage,High cost per entry
Who submits information to public and private registries?
0
5
10
15
20
25
30
35
priv com bank
pub com bank
pub devt bank
cred union/coop
finance corp
/leasing
cred card
issuers
firms pro
vd'g loans
retail & m
erchants
No.
of r
egis
trie
s
Public (of 29,w orldw ide)
Private (of 28 inLAC)
Firm data collected by public and private registries
0
5
10
15
20
25
30PublicCreditRegistries(30worldwide)
PrivateCreditBureaus(26 in LatinAmerica)
Distribution of data by public and private registries
0
20
40
60
80
100
Pe
rce
nt
Public
Private
Consumer Attention:Comparing Private and Public Registries
05
101520253035
Access toown data
ConsumerRelations
Department
Complaintstaken by
phone
Protocol fortaking
complaints
Comment onrecord
Surv
ey R
espo
nses
Private
Public
II. The importance of credit registries in financial markets - empirical evidence
Percentage of Banks which consult a credit registry for consumer loans
yes84%
no16%
Percentage of Banks which consult a credit registry for small business loans
yes93%
no7%
Importance of Registry information relative to other sources of creditworthiness
0
5
10
15
20
25
30
35
Collateral Financial Standing ofthe Borrower
Borrower's Historywith the bank
num
ber
of fi
rms
Information from a credit registry is more important
Information from a credit registry is less important
II. Importance of credit registries in financial markets
Can Credit Registries Reduce Credit Constraints?
Empirical Evidence on the Role of
Credit Registries in Firm Investment Decisions
Arturo Galindo
Margaret Miller
February 2001
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
• Barron & Staten (2000)– greater availability of information reduces default rates,
improves access to credit
• Kallberg & Udell (2000)– data from D&B has greater predictive power than firm
financial statements
• Galindo & Miller (2001)
CREDIT REGISTRY INDEX
0
20
40
60
80
100U
.S.
OT
HE
R D
EV
LA
C
BR
Z
CH
L
AR
G
PE
RU
CO
L
ME
X
EC
DR
Median Firm (Debt/Capital) v.Bureau Index (Galindo & Miller)
coef = .28506701, se = .10285224, t = 2.77
Me
dia
n (
De
bt/
Ca
pita
l)
Bureau Indexe( igen4 | X )
-.41669 .373786
-.244506
.202021
MALAYSIA
SPAIN
AUSTRIA
VENEZUEL
TURKEY
BELGIUM
CHILE
PORTUGALGERMANY
AUSTRALI
MEXICO
ITALY
COLOMBIA
BRAZILARGENTIN
PERU
RUSSIA
THAILAND
IRELAND
JAPAN
UNITED S
SWEDEN
Source: World Bank survey, World Scope and authors’ calculations
Empirical Model
itit
it
it
it
it FINMPKK
Ic
K
I32
1
11
titc
itcit GDP
CreditFININDEXFIN ,54 **
Regression Results for Credit Registry Variables
CF/K*Index: -0.046 (95%)
CF/K*(Pos/Neg): -0.022 (90%)
CF/K*Quantity: -0.102 (95%)
CF/K*Access: -0.044 (90%)
Type of loans, type of report not significant
Estimated sensitivity of firm investment to cash flows, with and without registries
(Galindo & Miller)Sensitivity ofInvestment toCash FlowsAssuming
Bureau Index=0
Sensitivity ofInvestment to
Cash Flows givencurrent bureau
index
PercentageReduction inCoefficient
ARGENTINA 0.078 0.047 39.7%BOLIVIA 0.072 0.047 35.3%BRAZIL 0.078 0.042 46.2%CHILE 0.071 0.039 44.2%COLOMBIA 0.079 0.052 33.7%COSTA RICA 0.079 0.045 43.4%DOMINICAN REPUBLIC 0.078 0.051 34.5%ECUADOR 0.076 0.053 30.9%GUATEMALA 0.080 0.053 32.9%MEXICO 0.080 0.054 32.4%PANAMA 0.062 0.037 40.8%PERU 0.078 0.047 39.3%URUGUAY 0.074 0.048 35.4%VENEZUELA 0.081 0.054 33.7%
Dependent Variable: Private Credit/GDP
Constant -17.64(-0.220)
Income per capita (logs) 0.59(0.170)
Average economic growth 6.18 *(1.750)
Effective creditors rights 13.45 ***(4.120)
Year credit registry 0.41 **(2.040)
R2 0.57Number of observations 28*** Significant at 1%.
** Significant at 5%.
* Significant at 10%.
Regression Results
Financial Development vs Years of Credit Registry
Venezuela
Uruguay
El Salvador
Peru
Panama
Mexico
Haiti
Guatemala
Ecuador
Dominican Republic
Costa Rica
Colombia
ChileBrazil
Bolivia
Argentina
-60
-40
-20
0
20
40
60
80
-40 -20 0 20 40 60 80
Years of Credit Registry
Priv
ate
Cre
dit/
GD
P
Coefficient: 0.41t-statistic: 2.04R2: 0.57
Note: Figures adjusted by effective creditors rights, average GDP growth, and income per capita (log).
III. Public policies to support
credit reporting -
emerging elements of “good practice”
III. Emerging elements of “good practice” Legal and regulatory framework
• Legal framework should encourage information sharing among lenders– review bank secrecy laws which can constrict
information flows
• Consideration of privacy issues important– broad privacy laws may unduly limit credit reporting
• Regulatory framework with enforcement– consumers have ability to bring complaints outside
judicial system
• Competition policy aspects of credit info.
III. Emerging elements of “good practice” Data collected and maintained
• Open system, not closed network– ownership by a limited group of lenders, bank
association, will discourage a broader database
• Collect both positive & negative information• Maintain data for a reasonable time frame - 5
years minimum– do not delete data on non-payments when debt repaid
III. Emerging elements of “good practice” Data collected and maintained
• Data should be inaccessible after a certain amount of time – time limits may vary by size of loan, type of inquiry
• Credit reports should not include highly sensitive information such as sexual orientation, political or religious affiliation, etc.
• Other identifying information, such as gender, should be evaluated more carefully
III. Emerging elements of “good practice” Data distributed
• Integrity and transparency are paramount– special standing of any group, including owners or
government, will discourage participation
• Open system preferable, reciprocity not necessary• Access to detailed information preferable
– loans described individually, not aggregates– institutions providing credit identified
• Restrictions to prevent “cherry-picking”• Distribution reflects privacy considerations
III. Emerging elements of “good practice” Credit reporting and bank supervision
• Supervisors include financial institution’s 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
III. Emerging elements of “good practice” Public Credit Registry (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
III. Emerging elements of “good practice” Public Credit Registry (PCR)
• Rating policy carefully considered– syndicated loans should have uniform rating– small loans don’t require monthly rating for PCR– requiring all loans by a borrower to have the same
rating can mask differences in loan types, quality– distribution of ratings to financial system can
create perverse incentives
III. Emerging elements of “good practice” Consumer Attention
• Borrowers should have access to their own data
• Consumer-friendly procedures in place to challenge erroneous information in reasonable time frame
• Record who has accessed data as part of report
• Clearly established privacy policy
IV. Conclusions
• Credit registries are an increasingly important part of modern financial systems
• Empirical evidence supports importance of credit registries for access to credit, especially by consumers and small and micro enterprises
• Policy conditions, including the legal and regulatory framework, are critical in the development of robust credit reporting systems