Credit Reporting, Relationship Banking, and Loan Repayment

Martin Brown and Christian Zehnder

No 2006-03, Working Papers from Swiss National Bank

Abstract: This paper examines the impact of credit reporting on the repayment behavior of borrowers. We implement an experimental credit market in which loan repayment is not third-party enforceable. We then compare market outcome with a public credit registry to that without a credit registry. This experiment is conducted for two market environments: first, a market in which repeat interaction between borrowers and lenders is not feasible and, second, a market in which borrowers and lenders can choose to trade repeatedly with each other. In the market without repeat interaction the credit market collapses without a credit registry, as lenders rightly fear that borrowers will default. The introduction of a registry in this environment significantly raises repayment rates and the credit volume extended by lenders. When repeat transactions are possible a credit registry is not necessary to sustain high market performance as relationship banking enforces repayment even when lenders cannot share information. In this environment credit reporting has little impact on market efficiency, it does however affect trading structure and distribution. The presence of a credit registry leads to fewer banking relationships and reduces the ability of lenders to extract rents from such relationships.

Keywords: Credit Market; Information Sharing; Relationship Banking (search for similar items in EconPapers)
JEL-codes: D82 G21 G28 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2006
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Credit Reporting, Relationship Banking, and Loan Repayment (2007)
Journal Article: Credit Reporting, Relationship Banking, and Loan Repayment (2007)
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