Should defaults be forgotten? Evidence from variation in removal of negative consumer credit information

Marieke Bos and Leonard Nakamura

No 14-21, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Practically all industrialized economies restrict the length of time that credit bureaus can retain borrowers? negative credit information. There is, however, a large variation in the permitted retention times across countries. By exploiting a quasi-experimental variation in this retention time, we investigate what happens when negative information is deleted earlier from credit files. We find that the loss of information led banks to tighten their lending standards significantly as the expected retention time was diminished from on average three-and-a-half to three years exactly. Simultaneously, we find that borrowers who experience this shorter retention time default more frequently. Since borrowers nevertheless obtain more net access to credit and total defaults do not increase overall, we cannot rule out that this reduction in retention time is optimal.

Keywords: Household finance; Consumer credit; Lending policy; Credit scoring (search for similar items in EconPapers)
JEL-codes: C34 C35 D63 D81 G21 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2014-07-01
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Citations: View citations in EconPapers (5)

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