Cross-border Credit in Europe: Hedging Information Risk

    • IMG_5199
    • Presentation speakers
      • Wei Dong, HSBC Business School, Peking University, China

    Abstract:

    Adverse selection and moral hazard are serious problems confronting any credit market. Credit registers mitigate these two problems by acting as a borrower’s disciplinary mechanism. However, for multinational markets, these problems become more intractable. The absence of cross-border consumer credit reporting facilities hinders the ability for lenders to judiciously extend credit to foreigners. This limitation results in under leveraged consumers and profits left on the table, irrespective of a rapidly growing foreign consumer base. Because national consumer credit systems differ and consumer privacy laws and regulations are concerned, cross-border information exchange pertaining to consumer credit histories is complex and under-exploited. In this article, we propose how lenders can extend credit to foreign customers in a way which bypasses credit information exchange protocols. Firstly, we analyze the market potential of cross-border credit in Europe and with data from Eurostat, we forecast that foreign residents will be 10% of European population in 20 years. By then, cross-border credit market will be very significant. Next we report on the current state of cross-border consumer credit reporting and foreigner lending. Then we offer two viable solutions: (a) creditor in borrower’s country of residence enters into a credit default swap with creditor in the borrower’s home country; and (b) creditor in the borrower’s home country reviews his/her credit record and issue a draft which can be cashed in another country. Finally, we elaborate on these solutions’ effect on European financial market integration.

 

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