Credit bureau
Definition and comparison to credit registries
A credit bureau is one of the two main types of credit reporting institutions. It collects information from a wide variety of financial and nonfinancial entities, including microfinance institutions and credit card companies, and provides comprehensive consumer credit information with value-added services such as credit scores to private lenders.
Credit bureaus are privately owned and privately operated companies. In contrast, credit registries—the other main type of credit reporting institution—tend to be public entities, managed by bank supervisors or central banks.
As privately owned commercial enterprises, credit bureaus tend to cater to the information requirements of commercial lenders. Though there is variation in the type and extent of information they collect, credit bureaus generally strive to collect very detailed data on individual clients. They therefore tend to cover smaller loans than credit registries and often collect information from a wide variety of financial and nonfinancial entities, including retailers, credit card companies, and microfinance institutions. As a result, data collected by credit bureaus are often more comprehensive and better geared to assess and monitor the creditworthiness of individual clients. In contrast, credit registries are often geared towards collecting system-wide information for macroprudential and other policy purposes.
Compared to credit registries, credit bureaus are a relatively recent institution. Although credit bureaus have existed in Germany, Sweden, and the United States for nearly a century, they emerged in many other high-income countries, including France, Italy, and Spain, as recently as the 1990s. Various countries use somewhat different names for credit bureaus. For example, credit bureaus are also called “consumer reporting agencies” in the United States and “credit reference agencies”in the United Kingdom.
Chapter 5 of the 2013 Global Financial Development Report provides an overview of the state of public and private credit reporting. It presents data on the ownership structure and extent of information collected by credit reporting institutions around the world.
The World Bank Group has supported the development of credit reporting systems around the world for more than a decade. The International Finance Corporation’s Credit Bureau Knowledge Guide (IFC 2006) provides an overview of experiences in developing the capabilities of private credit reporting institutions through public private partnerships and institutional innovation. The World Bank’s General Principles for Credit Reporting (2011) reviews best practices and makes policy recommendations for developing credit reporting systems.
Why credit bureaus matter?
Transparent credit information is a prerequisite for sound risk management and financial stability. Credit reporting institutions, such as credit bureaus, support financial stability and credit market efficiency and stability in two important ways. First, banks and nonbank financial institutions (NBFIs) draw on credit reporting systems to screen borrowers and monitor the risk profile of existing loan portfolios. Second, regulators rely on credit information to understand the interconnected credit risks faced by systemically important borrowers and financial institutions and to conduct essential oversight functions. Such efforts reduce default risk and improve the efficiency of financial intermediation. In a competitive credit market, these efforts ultimately benefit consumers through lower interest rates.
Effective credit reporting systems can mitigate a number of market failures that are common in financial markets around the world, and most severely apparent in less developed economies. The availability of high-quality credit information, for example, reduces problems of adverse selection and asymmetric information between borrowers and lenders. This reduces default risk and improves the allocation of new credit. Information sharing can also promote a responsible “credit culture” by discouraging excessive debt and rewarding responsible borrowing and repayment.
Perhaps most important, credit reporting allows borrowers to build a credit history and to use this “reputational collateral” to access formal credit outside established lending relationships. This is especially beneficial for small enterprises and new borrowers with limited access to physical collateral. Stylized evidence from the recent financial crisis also suggests that positive credit information helped to safeguard the financial access of creditworthy borrowers that would have otherwise been cut off from institutional credit.
Suggested reading:
Avery, Robert; Paul Calem, and Glenn Canner. 2004. Credit Report Accuracy and Access to Credit. Federal Reserve Bulletin, Summer 2004. Federal Reserve, Washington, DC.
International Finance Corporation (IFC). 2006. Credit Bureau Knowledge Guide, Washington, DC.
Miller, Margaret. 2003. Credit Reporting Systems and the International Economy. MIT Press, Cambridge, Massachusetts.
World Bank. 2011. General Principles for Credit Reporting. World Bank, Washington, DC.
World Bank. 2012. Global Financial Development Report 2013: Rethinking the Role of the State in Finance. World Bank, Washington, DC (https://www.worldbank.org/financialdevelopment)