SOAS Research Online

Abstract

Credit information sharing schemes, which are either mandatory because they are a regulatory requirement of the central bank or voluntary in the sense of being discretionary as a private arrangement among peers, are aimed at reducing asymmetric information in the banking sector. The schemes now exist in many advanced and developing countries. However, although there is increased research on the role and effectiveness of information sharing, the evidence is mixed and inconclusive; indeed, the jury is still out there on identifying the precise effects and mechanisms as to how the effects occur. This thesis aims to contribute to the existing literature by investigating how banking activities are affected when credit information sharing is mandatory, voluntary, and when mandatory and voluntary schemes coexist. The thesis identifies critical gaps in the literature, tracks the theoretical underpinnings of the main research question in each gap, and investigates each research question using a panel dataset of 368 banks from 40 developing countries covering the period 2012-2020. The main findings are threefold. First, it is found that mandatory information sharing reduces credit growth and credit risk when it coexists with stringent capital regulation or a policy that allows banks to apply provisioning rules to a loan net of collateral. Second, the threshold analysis shows that the relationship between bank diversification and excess value is reverse U-shaped. Mandatory information sharing reduces excess value of banks by increasing diversification above the optimal level; consequently, it is associated with a diversification discount. Voluntary information sharing prevents excessive diversification, increases excess value of banks, and it is associated with a premium. Third, information sharing (mandatory or voluntary) reduces procyclicality of bank liquidity creation. The channels supporting the liquidity smoothing role of information sharing are increase in access to interbank liquid funds, increase in the accuracy of default probability estimates, and decrease in bank asset write-offs. Our findings suggest that mandatory information sharing incentivizes bank riskshifting from lending to non-lending activities, especially when it exists without voluntary scheme. Therefore, the study encourages policymakers to promote the coexistence of both schemes to improve the performance of mandatory information sharing.