Relationship Banking and Credit Scores: Evidence from a Natural Experiment

Tali Bank (), Nimrod Segev and Maya Shaton
Additional contact information
Tali Bank: Bank of Israel
Maya Shaton: Ben-Gurion University

No 2023.05, Bank of Israel Working Papers from Bank of Israel

Abstract: We show the effect of credit scores’ introduction on consumer credit prices. Utilizing a novel dataset of the universe of loans in Israel, we find that a decline in information asymmetry, following the introduction of credit scores introduction, led to a decrease in loan prices for households with strong relationship banking. Prior to that, when banks held a monopoly on potential borrowers’ credit history, they charged higher interest rates, all else equal, as predicted by theoretical models. We further show that these informational rents significantly decrease once credit scores are introduced, resulting in a decline in the hold-up problem. To the best of our knowledge, this paper is the first to show the causal impact of credit scoring on households’ loan pricing. Our results underscore the importance of information sharing in consumer credit markets, and have important public policy implications.

Keywords: Credit Scores; Relationship Lending; Relationship Banking; Hold-up Problem; Consumer Credit; Information Sharing; Credit Register (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2023-03
New Economics Papers: this item is included in nep-mfd, nep-pay and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2023.05.pdf First Version, 2023 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:2023.05

Access Statistics for this paper

More papers in Bank of Israel Working Papers from Bank of Israel Contact information at EDIRC.
Bibliographic data for series maintained by Yossi Yakhin ().