Credit Reporting, Relationship Banking, and Loan Repayment

Swiss National Bank Working Paper No. 2006-03

41 Pages Posted: 8 Mar 2007

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Christian Zehnder

University of Lausanne

Date Written: January 2006

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

JEL Classification: G21, G28, D28

Suggested Citation

Brown, Martin and Zehnder, Christian, Credit Reporting, Relationship Banking, and Loan Repayment (January 2006). Swiss National Bank Working Paper No. 2006-03. Available at SSRN: https://ssrn.com/abstract=968387 or http://dx.doi.org/10.2139/ssrn.968387

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Christian Zehnder

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

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