The More The Better? Information Sharing And Credit Risk

Correctly estimating borrower credit risk is a task of particular and growing importance for banks all around the globe. Formal information sharing mechanisms are aimed to reduce information asymmetry in the credit markets and to enhance the precision of those estimates. In the literature, however, whether more, and more detailed, borrower information shared by credit bureaus and credit registries is always associated with higher quality bank credit portfolios and lower credit risk is not completely unambiguous. More credit information disclosed by information intermediaries tends to result in a weaker disciplinary effect of credit history, which means higher credit risk. The accuracy of assessing the creditworthiness of borrowers grows due to an increase in the predictive power of scoring models, which leads to a reduction in credit risk. In this paper, we make a first attempt to examine the nonlinearity of this effect. We study the relationship between the depth of credit information disclosed and the stability of the banking sector in terms of credit risk. Based on data on 80 countries for 2004–2015, we show that the relationship between disclosure and credit risk is non-linear: we observe the lowest levels of credit risk at the minimum and maximum levels of disclosure. We analyze the influence of national institutional quality and financial development on the nature of the relationship. We show that credit risk decreases with increasing amounts of disclosure by credit bureaus and credit registers in well-developed financial markets and in a high-quality institutional environment.