A new report released this week by the Policy and Economic Research Council (PERC) on the dynamics between private credit bureaus (PCBs) and public credit registries (PCRs) found growing global momentum to strengthen PCRs. The report, titled “Are Expanding PCRs Crowding Out PCBs?” looked at the potentially harmful effects of this trend and the optimal way to structure credit information sharing systems.
Credit information sharing systems are vital infrastructure. They generally consist of privately-run institutions, government-run institutions, or both. International best practices dictate that PCRs are complementary to PCBs. According to the World Bank, PCRs have traditionally played a supervisory and risk monitoring role, while PCBs provide predictive credit and other data to lenders and other market actors to aid underwriting credit and eligibility determination for individuals and to assess loan portfolio risk and performance.
In the wake of the 2008 Global Financial Crisis, which caught many PCRs off guard and exposed data deficiencies, many central banks and policymakers acted to enhance the capacity of PCRs by increasing their budget, adding IT staff, and expanding access to different data assets. This type of reaction is justified and welcomed. However, some governments have recently begun to expand PCR functions, putting them in direct competition with existing PCBs and treating them more as substitutes to PCBs. This type of policy response is risky as such competition can starve PCBs of revenue, reduce investment in innovation, and reduce competition among lenders which weakens the entire financial system.
The report featured case studies of credit information systems from ten different countries. It highlights the fact that almost two decades of research has found PCBs are relatively more innovative and client-oriented than PCRs. PCBs focus on institutional clients and invest in a full suite of valuable direct to consumer services. Lower-income people, small businesses, and small lenders benefit the most from PCBs through increased access to credit, decreasing interest rates, and increased bank competition. Studies have repeatedly found that PCBs are correlated with increased lending to the private sector as a share of GDP and decreased rates of nonperforming loans, while PCRs were not statistically significant.
“While the desire to collect more data for supervision and monitoring purposes after the 2008 financial crisis is understandable, direct competition between PCRs and PCBs must be avoided at all costs,” said Dr. Michael Turner, President of PERC. “The intentions for expanding the roles of a PCR may be good, but the objective should be about capacity building and not mission creep.”