Transcript (I) What happens to loan performance?

Privacy Symposium
The Institute of Law
China Academy of Social Science
Global Landscape
Dr. Michael Turner
Economic Considerations in Privacy Law
Political & Economic Research Council
June 17, 2006
1
The Promise of Information Led
Development (ILD)


Deloitte estimates that between 2002-2006
$356 billion worth of global financial
services will relocate to India, creating 2
million new jobs. (“worldwide sourcing”)
In advanced and emerging economies, use
of personal information increasing.




June 17, 2006
Risk assessment (credit reporting)
Marketing (offline and online)
Location decisionmaking (retail outlets)
Inventory decisionmaking (initial and ongoing)
2
Benefits of Information Sharing

Measurement difficulties



June 17, 2006
Quantifying economic value of information for
national economy impossible
US Federal Reserve Bank staff studies (1999)
linked productivity gains to use of Information
Technology (IT)--subsumed information
Empirical and theoretical micro-economic
studies highlight value of information flows more
narrowly (e.g. financial services sector)
3
Case #1: Apparel Distance Shopping



$15 billion clothes sold via direct mail and
Internet in US during 2000.
Retailers rely on “third-party data”--personal
information about existing customers--to
target prospective customers.
Without access to third-party data, apparel
retailers costs increase approximately 7%,
resulting in $1 billion additional costs.
(ISEC 2001--Michael Turner)
June 17, 2006
4
Case #2: Nonprofits and Charities



Third-party data used extensively by US nonprofit
and charitable organizations to solicit contributions
($80 billion raised via direct mail and telephone).
As with merchants, charities append “internal” data
on existing contributors with “external” data to
develop list of prospective contributors.
Without access to third-party data, US charities and
nonprofits, costs increase 30%, reducing funds
available to charities by $10 billion.
(ISEC 2002--Michael Turner)
June 17, 2006
5
Why Share Payment Information?
Problems facing lenders and how more payment
information can help solve them
o Too many high-risk
borrowers (“adverse
selection”)
o Not enough incentives to pay
(“moral hazard”)
o Misidentifying likelihood of
paying (“asymmetric
information”)
June 17, 2006
Consumers
o Fairer prices
o Wider access to credit
o Offers “calibrated” to match
credit risk and credit capacity
Lenders
o Reduced delinquencies
o Expand old markets and enter
new markets
The Economy
o Better overall financial
performance
o Growth
6
Rationale: Finance is Crucial
to Economic Growth
Established: Financial sector mobilizes savings and allocates
capital for investment and consumption  growth
Some estimates of impact.* If private sector lending, increased by
33% of GDP, results for economy:

+1.0% annual per capita GDP growth

+0.8% annual per capita capital stock growth

+0.8% annual productivity growth
June 17,
2006Levine, “Financial Development and Economic Growth: Views and Agenda” Journal of Economic Literature,
*Derived from findings
of Ross
Vol. 25(June 1997), pp. 688–726. Their findings are consistent with those of other studies, see Jose De Gregorio and Pablo Guidotti,
“Financial Development and Economic Growth.” World Development, Vol. 23, No. 3, (March 1995) pp. 433-448. Their reported impacts were
larger.
7
Estimations: Private Full-File Coverage
and Private Sector Borrowing
VARIABLE
Model I
Consta nt
Log of GDP per capita
(adjusted for PPP)
Avg. Change in GDP
(1995-2004)
Legal Rights of Creditors
(from 0 to 10)
Credit Information 1
(from 0 to 6)
Private Full-file Coverage
(0 to 100, as percentage of adults)
Private Negative-only Coverage
(0 to 100, as percentage of adults)
Public Full-fi le Coverage
(0 to 100, as percentage of adults)
Public Negativ e-only Coverage
(0 to 100, as percentage of adults)
R squared
F-stat
(p value)
0.7075
16.93
(1.88e-012)
Residual Standard Error
N
* p < 0.1
** p < 0.05
***p < 0.01
-142.40***
(35.31)
20.31***
(4.65)
-1.20*
(0.70)
4.55**
(2.07)
-3.87
(2.88)
0.72***
(0.20)
-0.02
(0.86)
-0.11
(0.41)
0.16
(0.46)
June 17, 2006
Model IV
(reduced)
-130.80***
(32.20)
16.85***
(3.87)
4.80**
(1.97)
0.67***
(0.16)
0.6883
44.9
(1.887e-015)
29.45
65
29.12
65
Lesson: what matters?
• Wealth
• Creditor Rights
• Reporting
o private
o full-file
o with widespread participation
For a country, going from no adults to
having all (100% of) adults with positives
and negatives in a private bureau increases
private sector lending by more than 60% of
GDP.
(Without the US and UK, which have high
private sector lending, the estimated
increase is still more than 45% of GDP.)
8
Participation & Loan Performance
Colombia 2005
15%
Default Rates
12%
9%
6%
3%
0%
0%
15%
30%
45%
60%
75%
90%
Acceptance Rates
June 17, 2006
100% Reporting Full File
75% Reporting Full File
25% Reporting Full File
0% Reporting Full File
50% Reporting Full File
TransUnion/PERC 2006
9
Data Privacy: When Only
Delinquencies Can Be Shared (I)
What happens to loan performance?
Source: World Bank (Miller and Galindo)
June 17, 2006
10
Data Privacy: When Only
Delinquencies Can Be Shared (II)
What happens to credit access?
June 17, 2006
11
Impact on Non-Financials-Change in Acceptance Rates
Sample (3.1 million Colombian files)
NON -FINAN CIALS: ACCEPTANCE RATE
Share of furnishers providing positive and negative information
Target De fault rate
5%
7%
10%
12%
100%
5.50%
37.30%
61.03%
69.75%
75%
4.00%
29.95%
49.36%
63.27%
50%
2.95%
17.96%
43.14%
57.70%
25%
1.96%
10.07%
36.01%
50.43%
Non financials: cell-phones, utilities, rent
TransUnion/PERC 2006
June 17, 2006
12
Loan Performance in Japan (2004)

A more comprehensive reporting system (TeraNet – similar to
proposed D&B model for Australia) reduces the probability of
delinquencies (60+ days) by 34.1% for the mean loan.

The value of more comprehensive data increases with loan
amount (reduces probability of delinquency by 41.3% for the
mean large loans).
(Waseda University 2004)
June 17, 2006
13
Loan Performance in Hong Kong

In the four years to 2002, Hong Kong experienced growth in personal bankruptcy of
1,900%. Around 12% of all personal bankruptcy was caused by credit card debt. Credit
card write-offs stood at 13.6% by the end of 2002. This was significantly higher than
comparable Asian nations such as Singapore and Korea, which had write-off rates of
5.5% and 6.1% respectively.

Defaulting customers in Hong Kong had acquired debts up to 55 times monthly
income in 2000 and 42 times monthly income in 2002.

Following the shift to more comprehensive reporting, Hong Kong Monetary Authority
figures show that between December 2002 and December 2004:


Credit card write-off ratios declined from 13.6% to 3.76%; and
Credit card delinquency ratios declined from 1.25% to 0.44%.
June 17, 2006
14
How Information Sharing Helps
the Relatively Less Privileged
Less participation
Less deep
Racial minorities,
the young, women,
and lower income
groups suffer
relatively worse
than racial
majorities, older,
men, and higher
income groups.
June 17, 2006
15
What Information Sharing Has
Meant for Price of Credit?
Share of card account balances by interest rate tier
Credit card
interest rate tier
over 18% and over 18% and over18% and over 18% and over 18%
r e voand
dnaover
%81
99 % 16.5 -17.99 % 16.5 -17.99 % 16.5 -17.99 % 16.5 -17.99 %
%
99.7
1- 5.6%
1
16.5
-17.99
49 % 11 – 16.49 % 11 – 16.49 % 11 – 16.49 % 11 – 16.49 %
%11
94–.616.49
1 – 11%
99 %
5.5-10.99 %
5.5-10.99 %
5.5-10.99 %
5.5-10.99 %
%9
9.01-5.5 %
5.5-10.99
5.5 %
< 5.5 %
< 5.5 %
< 5.5 %
< 5.5 %
% 5.5 << 5.5 %
20%
60%
00%
8 %60%
06 %80%
04 %20%
02
%
0
20% %80%
40%
0%
0%
40%
20%
40%
60%
80%
0%
40%
0%
1990
June 17, 2006
20%
60%
0% 60%
20% 80%
40%
40%
80%
60%
80%
2002
Declining cross-subsidy from the
creditworthy to the credit-risky
16
Conclusions


Responsible use of consumer information
yields efficiencies and growth across a large
number of sectors
Overly-restrictive data regimes often worst
of both worlds:


June 17, 2006
No additional privacy protections
Enforced inefficiencies
17