55.93 Proponents claim that empirical studies provide important evidence about the likely credit market efficiency and economic benefits of more comprehensive credit reporting. A number of studies have been referred to in submissions and consultations. These and other relevant studies are discussed briefly below.
Credit market efficiency
55.94 The research most commonly cited in this context is the Barron and Staten research, published in 2000. Barron and Staten compared the position of credit providers in relation to risk assessment under the rules provided by the FCRA in the US and the Privacy Act respectively, using US data provided by Experian Information Solutions Inc, a leading US credit reporter. The research compared the accuracy of risk scoring models using the credit reporting variables available under the US system with the more limited set of variables available in Australia.
55.95 The research found that the more comprehensive form of credit reporting would enable credit providers to achieve a lower rate of defaults on loans, while maintaining the same loan approval rate (for example, at an approval rate of 60%, the Australian variables produced a default rate of 3.35%, as compared to 1.9% for the US variables). At the same time, assuming that default rates were maintained at the same rate (for example, 4%), credit providers using the Australian variables would extend new credit to 11,000 fewer consumers for every 100,000 applicants than would be the case if they were allowed to use the more comprehensive data available under US law.
55.96 Later research by Barron and Staten, conducted at the request of the Australian Finance Conference (AFC), compared the effect of the US variables with an ‘intermediate model’ of credit reporting that allows for the reporting of the ‘existence (and type) of accounts that are in good standing or have been paid in full, but does not report current balances or revolving account credit limits’. This 2007 research found that, at the targeted approval rate of 60%, the intermediate model produced a 2.46% default rate.
55.97 The implications of the Barron and Staten research are said to include that consumer credit will be less available and more expensive in countries (such as Australia) where credit reporting omits categories of variables that would provide a more complete picture of a consumer’s financial position.
55.98 Other evidence about the benefits of more comprehensive reporting is said to derive from studies that compare credit reporting regimes in different jurisdictions with the characteristics of the credit markets in those jurisdictions. For example, Tullio Jappelli and Marco Pagano analysed the credit reporting regimes and credit markets in 43 countries, including the US, Australia and most other Organisation for Economic Co-operation and Development countries. Their econometric analysis found that the breadth and depth of a credit market was positively associated with the extent of the credit information that was exchanged between lenders.
55.99 In 2003, a US Congressional Research Service report surveyed the literature (including that already discussed) and concluded that empirical research suggested that privacy laws that restrict the reporting of consumer credit data could lead to the potential loss of significant economic benefits. That is, credit data limitations may increase the cost of consumer credit, reduce accessibility and lower the overall volume of lending.
55.100 There is debate about the conclusions that may be drawn from empirical studies of the effects of more comprehensive credit reporting on credit markets in view of methodological limitations and the assumptions built into research models. For example, it may be observed that the Barron and Staten research—in comparing the accuracy of credit scoring using variables available under the US system with the more limited set of variables available in Australia—disregarded the ‘positive’ information provided on application forms.
Their results are not directly comparable to actual experience in the Australian market, because they do not factor in the additional (though limited) predictive value of the additional demographic data that Australian lenders generally use to make up that difference.
55.101 The Victorian Review noted that, in order to consider fully the possible benefits of more comprehensive reporting in assessing capacity to repay, research would need to show a material gap between the information provided by the consumer and the information in a more comprehensive credit report. That is, whether the information sourced directly from consumers
is materially less helpful to assessing capacity to repay than that from a positive credit reporting agency having regard for:
weight given to negative information rather than positive information generally;
existing capacity to verify positive information, albeit through a more costly process of having to contact other credit providers individually;
likely inaccuracies in the data;
the potential use of profit scoring mechanisms;
other factors independent of this information that may be more material to repayment capacity, such as loss of job, death/separation from spouse, etc.
55.102 Submissions to this Inquiry referred to the experience in a range of other countries as support for the view that the introduction of more comprehensive reporting would have significant benefits for credit markets.
55.103 Dun and Bradstreet referred to data from Japan, Hong Kong and Latin America (in addition to placing reliance on the Barron and Staten research). For example, it was said that Hong Kong experienced a dramatic decline in loan defaults following the introduction of more comprehensive reporting in 2002. MasterCard, American Express and Veda Advantage also referred to the Hong Kong experience. Veda stated:
Australia should act earlier and more decisively than in Hong Kong, where a negative credit reporting regime failed to prevent a huge surge in consumer bankruptcies amid similar credit tightening in 2002. More comprehensive credit reporting was then introduced and helped consumers and their lenders manage risk better, with a halving of bankruptcies by 2004, and a further 90% reduction by 2006.
55.104 An important qualification in drawing any conclusions from this experience may be that Hong Kong’s economy began to recover from a recession in this period, and it is possible that this recovery was a more important cause of the decline in loan defaults than credit reporting reform. More generally, different macro-economic environments limit the applicability of conclusions drawn from international experience about the possible effects of more comprehensive reporting on levels of default, credit availability and interest rates in Australia. There are many factors, relating to credit markets and macro-economic conditions generally, which have an influence on these outcomes.
55.105 Some studies cast doubt on the relationship between more comprehensive credit reporting and credit market efficiency. Jentzsch and San José Riestra created a ‘credit reporting regulatory index’ for 27 jurisdictions in Europe and the US, which measured the extent of information privacy regulation affecting credit reporting. Their research found that, while increased coverage of credit reporting (in terms of the number of credit reports issued scaled by population) is associated with increased access to credit, there was no evidence that privacy restrictions greatly hampered information sharing in consumer credit markets.
55.106 Research also has modeled the macro-economic impact of introducing more comprehensive credit reporting in Australia. The MasterCard/ACIL Tasman report concluded that comprehensive credit reporting would generate a one-off increase in capital productivity of 0.1%, which would translate to economic benefits to the Australian economy of up to $5.3 billion, in net present terms, over the next 10 years.
55.107 ACIL Tasman used what was described as an ‘applied general equilibrium model’ of the Australian and world economies to quantify the benefits of more comprehensive credit reporting. The model assumed that ‘the efficiency of the credit market has implications for the efficiency of virtually every sector of the economy’, and took as one starting point the Barron and Staten findings about the possible reduction in the rate of default if a US-style comprehensive reporting system were adopted.
55.108 As with research about credit market effects, there are methodological limitations built into research into the macro-economic impact of credit reporting systems. On one view, the subject matter does not lend itself to precise modelling due to the level of complexity and the small orders of magnitude involved in terms of benefits. It is questionable whether any modelling will provide definitive answers. For example, Australia is recognised as having a credit market that is very competitive by international standards. This may limit the potential for further competitive gains resulting from more comprehensive reporting. Equally, a macro-economic upturn seems likely to have a much greater influence on credit availability than any change to a credit reporting system.
 The Barron and Staten research was referred in: Veda Advantage, Submission PR 272, 29 March 2007; MasterCard Worldwide, Submission PR 237, 13 March 2007; GE Money Australia, Submission PR 233, 12 March 2007; Dun & Bradstreet (Australia) Pty Ltd, Submission PR 232, 9 March 2007; Consumer Credit Legal Centre (NSW) Inc, Submission PR 28, 6 June 2006.
 J Barron and M Staten, The Value of Comprehensive Credit Reports: Lessons from the US Experience (2000) Online Privacy Alliance <www.privacyalliance.org/resources/staten.pdf> at 5 May 2008.
 Ibid, 20. The more comprehensive credit reporting model would approve 83% of applicants compared to 74% of applicants using the more restricted information.
 M Staten and J Barron, Positive Credit Report Data Improves Loan Decision-Making (2007) Australian Finance Conference.
 J Barron and M Staten, The Value of Comprehensive Credit Reports: Lessons from the US Experience (2000) Online Privacy Alliance <www.privacyalliance.org/resources/staten.pdf> at 5 May 2008, 28.
 T Jappelli and M Pagano, Information Sharing, Lending and Defaults: Cross-Country Evidence (2000) Centre for Studies in Economics and Finance, University of Salerno. The Jappelli and Pagano research was referred to in: MasterCard Worldwide, Submission PR 237, 13 March 2007.
 L Nott, The Role of Information in Lending: The Cost of Privacy Restrictions (2003), 9.
GE Money Australia, Submission PR 233, 12 March 2007.
 ‘Profit scoring’ essentially refers to a score that takes into account profits generated from late payments, for example, rather than the actual risk. Accordingly, risk reduction may compete with profit scoring: Consumer Affairs Victoria, The Report of the Consumer Credit Review (2006), 261.
 Ibid, 260. In April 2005, ANZ conducted a trial of completed statements of financial position provided by customers applying for a credit limit increase in the ACT. The study found that 24% of forms had errors and omissions in financial details: ANZ, Submission PR 291, 10 May 2007.
 Dun & Bradstreet (Australia) Pty Ltd, Submission PR 232, 9 March 2007.
 Veda Advantage, Submission PR 498, 20 December 2007; American Express, Submission PR 257, 16 March 2007; MasterCard Worldwide, Submission PR 237, 13 March 2007. MasterCard Worldwide claimed that, in Hong Kong, material defaults by individuals fell by 27% following the introduction of comprehensive credit reporting: MasterCard Worldwide, Submission PR 237, 13 March 2007. See also Centre for International Economics and Edgar Dunn and Company, Options for Implementation of Comprehensive Credit Reporting in Australia [Prepared for MasterCard Worldwide] (2006), 17.
Veda Advantage, Submission PR 498, 20 December 2007.
 N Jentzsch and A San José Riestra, ‘Consumer Credit Markets in the United States and Europe’ in G Bertola, R Disney and C Grant (eds), The Economics of Consumer Credit (2006) 27, 51.
 ACIL Tasman, Comprehensive Credit Reporting: Main Report of an Analysis of its Economic Benefits for Australia [Prepared for MasterCard International] (2004). The ACIL Tasman research was referred to in: MasterCard Worldwide, Submission PR 237, 13 March 2007; Dun & Bradstreet (Australia) Pty Ltd, Submission PR 232, 9 March 2007.
 ACIL Tasman, Comprehensive Credit Reporting: Executive Summary of an Analysis of its Economic Benefits for Australia [prepared for MasterCard International] (2004), 3. See also ACIL Tasman, Comprehensive Credit Reporting: Main Report of an Analysis of its Economic Benefits for Australia [Prepared for MasterCard International] (2004), 28.
 ACIL Tasman, Comprehensive Credit Reporting: Main Report of an Analysis of its Economic Benefits for Australia [Prepared for MasterCard International] (2004), 3.
 Ibid, 24.