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Should defaults be forgotten? Evidence from legally mandated removal

  • Marieke Bos
  • Leonard Nakamura

Swedish law mandates the removal of information about past credit arrears from the individuals’ credit reports after three years. By exploiting a quasi-experimental variation in retention times caused by a change in the credit bureau’s timing of arrear removal, we are able to examine the causal effect of increased retention time on consumers' short- to medium-run credit scores, loan applications, credit access, and future defaults.> We find that a prolonged retention time increases the need for and access to credit relative to shorter retention times. Additionally, prolonged retention times seem to reduce the likelihood to default again two years after removal. We also find that in both regimes only a minority of the individuals (less than 27 percent) receive a new arrear within two years after removal, suggesting that only a minority of the individuals who received an arrear may be inherently high risk.> Alternatively, our results may be interpreted as suggesting that removal of credit arrears may induce borrowers to exert greater effort along the lines of Vercammen (1995) and Elul and Gottardi (2007). Either interpretation opens the possibility that credit arrear removal is welfare enhancing.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-29.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-29
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  1. Ronel Elul & Piero Gottardi, 2011. "Bankruptcy: is it enough to forgive or must we also forget?," Working Papers 11-14, Federal Reserve Bank of Philadelphia.
  2. Nakamura, L.I. & Roszbach, K., 2010. "Credit Ratings and Bank Monitoring Ability," Discussion Paper 2010-37S, Tilburg University, Center for Economic Research.
  3. Vercammen, James A, 1995. "Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets," Economica, London School of Economics and Political Science, vol. 62(248), pages 461-78, November.
  4. repec:dgr:kubcen:201037s is not listed on IDEAS
  5. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
  6. David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, vol. 77(4), pages 725-748, October.
  7. Leonard I. Nakamura & Kasper Roszbach., 2013. "Credit ratings and bank monitoring ability," Working Papers 13-21, Federal Reserve Bank of Philadelphia.
  8. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January.
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