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