Big banks may be forced to participate in Comprehensive Credit Reporting (CCR) recommended in David Murray’s Financial Services Inquiry, despite their resistance to do so.
The Inquiry’s final report recommends that the industry should continue to implement the new CCR regime. This will give lenders access to an expanded range of information on borrowers through supporting efforts to expand credit data sharing between each other. The report argues that this will ensure higher quality data, which will “lead to better credit decisions and improved credit conditions for borrowers.”
The new rules will allow credit providers to share individuals’ positive credit history data, such as loan repayment history as well as negative credit events, such as an individual’s history of defaults.
At the moment, the Inquiry supports industry efforts to expand credit data sharing under the new voluntary CCR regime. However if, over time, participation is inadequate, Government should consider legislating mandatory industry participation. According to the Australian Bankers’ Association, big banks are resisting any moves towards mandatory legislation due to the cost and complexity.
“The banking industry does not support mandatory CCR because of its significant cost, complexity and potential for unintended consequences,” it said in its FSI submission.
However, ME Bank Chief Risk Officer Carlo Cataldo said an ME Bank analysis of international markets shows comprehensive data sharing is less likely to occur in highly concentrated banking markets such as Australia. Big banks are concerned that more liberal data sharing with competitors will decrease their market share, as consumers will be more likely to shop around.
“More data sharing enables lenders to better price risk – they no longer have to set interest rates based on average loan performance in which low risk subsidise high risk borrowers. This allows for increased competition by removing monopolies on credit data and giving other smaller and newer lenders the increased ability to compete on price,” Cataldo said.
The benefits of CCR to the Australian economy will be significant, according to Cataldo, but the number of participants is essential to CCR’s success and as such, big banks will have to be forced to participate to make it work and let the economy reap the benefits.
“Unless a significant proportion of banks participate in CCR, consumers without defaults or late payments on their credit report (the vast majority) are unlikely to receive the full benefit of their good credit performance, including greater access to credit and lower prices. The broader economy will also fail to receive the boost to growth that should result from increased lending and better risk management.
“In terms of macroeconomic benefits, we found a number of Australian studies that show CCR can lead to an increase in private sector lending contributing to growth in GDP, productivity and capital stock growth. A study by Access Economics in 2008 showed comprehensive credit reporting could contribute economic growth to the value of $1.7 billion per annum assuming full participation by all banks,” Cataldo said.