Relationship Banking and Credit Scores: Evidence from a Natural Experiment

30 Pages Posted: 4 Oct 2023

See all articles by Tali Bank

Tali Bank

Bank of Israel

Nimrod Segev

Bank of Israel - Research Department

Maya Shaton

Ben-Gurion University; Columbia Law School

Date Written: March 14, 2023

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

JEL Classification: G21, G28

Suggested Citation

Bank, Tali and Segev, Nimrod and Shaton, Maya O, Relationship Banking and Credit Scores: Evidence from a Natural Experiment (March 14, 2023). Available at SSRN: https://ssrn.com/abstract=4567568 or http://dx.doi.org/10.2139/ssrn.4567568

Tali Bank

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

Nimrod Segev

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel

Maya O Shaton (Contact Author)

Ben-Gurion University ( email )

Guilford Glazer Faculty of Business and Manag
Ben-Gurion University of the Negev
Beer-Sheva, 8410501

Columbia Law School

435 West 116th St
NEW YORK, NY 10027

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