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Economic effects of positive credit information sharing : The case of Korea

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Frame of Image t maximizing banks, and utilizing a unique dataset of 2 million consumer loan obligors in Korea, we investigate the economic effects of sharing positive credit information in addition to negative credit information already exchanged. We find that the discriminatory power of the credit scoring model improves significantly. We proceed to investigate the economic effects of the information gap in a competitive credit market by assuming two groups of banks that differ only in the level of credit information sharing. Banks that share negative information only suffer from deterioration of the borrower pool and reduced profit, as high credit risk borrowers are more concentrated on this group due to under-pricing of risks. Our finding indicates that banks have incentives to voluntarily participate in the positive information sharing mechanism even in the presence of a public credit registry, since even a small difference in discriminatory power stemming from the information gap may lead to a significant fall in profitability as the distribution of borrower quality changes endogenously due to adverse selection problems. JEL classification: D82; G21; G28 Keywords: Credit risk; Information sharing; Loan pricing; Adverse selection; Korea _________________________________________________ * Corresponding author, Associate Professor, Graduate School of International Studies, Yonsei University, 134 Shinchon-dong, Seodaemoon-gu, Seoul 120-749, Korea. Tel: 82-22123-4210, jhahm@yonsei.ac.kr **


Full Text
Title Economic effects of positive credit information sharing
Similar Titles
Sub Title

The case of Korea

Material Type Reports
Author(English)

Hahm, Joon-Ho; Lee, Sangche

Publisher

Korea Institute of Finance

Date 2008-08
Pages 30
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Economic System
Holding Korea Institute of Finance

Abstract

Currently in Korea, negative credit information, such as loan default and arrears, is collected and shared among all banks via a regulatory agency on a centralized and compulsory basis. However, positive credit information is exchanged among participating banks via private credit bureaus on a voluntary and reciprocal basis. Employing optimal credit decision models of profit maximizing banks, and utilizing a unique dataset of 2 million consumer loan obligors in Korea, we investigate the economic effects of sharing positive credit information in addition to negative credit information already exchanged. We find that the discriminatory power of the credit scoring model improves significantly. We proceed to investigate the economic effects of the information gap in a competitive credit market by assuming two groups of banks that differ only in the level of credit information sharing. (The rest omitted)