Our method was to take data from the World Bank on the establishment of PCRs in different jurisdictions – 24 developing countries between 1994 and 2013 – and measured the timeliness of loan-loss reserves by banks in each country. This was done by comparing current loan-loss reserves with the actual total of non-performing loans in the following year.
Then we compared the timeliness of banks’ reporting of loan-loss reserves in PCR jurisdictions with those in similar countries without such registers. We found that the compulsory sharing of credit information improved timeliness in bad-loan provisioning by between 41 per cent and 59 per cent.
Of course, it is in a sense unsurprising that a better overview of the loan landscape leads banks to make more accurate provisions against anticipated losses. Furthermore, there is evidence that some jurisdictions may have introduced mandatory PCRs precisely because they improve such provisioning.
Our findings are, as we said, from emerging economies only, and more work would be needed to apply them more broadly. Also, there may be a downside to the wider sharing of information if it encourages banks to ration the supply of credit in ways that do not lead to an increase in social welfare.
The third area of our study focused on the impact of the European Central Bank’s 2013 loan-level reporting initiative. Again in response to the financial crisis, the ECB ordered those eurozone banks that use securities backed by loan assets as collateral for the banks’ own borrowing to make standardised quarterly reports on the performance and structure of those assets. As the name suggests, these reports were to be at the level of millions of individual loans.
An immediate effect was to bring about a dramatic increase the information available to investors about the banks’ securitised loan portfolios – in effect, from no information at all to details on every single loan. In the slightly longer term, we found that those banks required to make loan-level disclosures raised more capital more cheaply than had been the case before the disclosure regime; and they increased their lending.
Why would this be?
Previous research has suggested that credible reporting regimes reduce the cost of capital and improve corporate financing decisions because they narrow the information gap between the banks and those who supply its capital. This, in turn, means investors are happier to lend at reduced cost, given the lower perceived risk of doing so.
In other words, the reporting regime would seem to have increased the supply of credit to the real economy. Banks in the disclosure regime saw their debt financing costs fall relative to similar banks outside the regime. They also increased their inter-bank borrowings and issued more equity.
What is more, they seem to have been passing these benefits on to borrowers, rather than simply paying off debts or increasing dividends. These banks showed a four to five per cent increase in loan growth.
There can, of course, be no growth in the supply of loans without a corresponding rise in the demand for credit. Should the latter show a marked increase, then loan growth may tell us nothing about the willingness of banks to lend.
Given the importance attached by regulators to increasing the credit supply to small and medium-sized enterprises (SMEs), we examined ECB surveys on the access of SMEs to finance. Because they are designed specifically to gauge how easy it is for SMEs to get bank loans, they allow loan supply to be distinguished from demand.
We established that in countries where banks provide loan-level disclosures, SMEs found credit access easier relative both to borrowers in other countries and to their own experience before the introduction of the disclosure regime.
To sum up, across three quite different areas, officially mandated increases in disclosure and transparency on the part of the banks have proved beneficial not only to the wider economy but to the banks themselves.