Abstract
In the United Kingdom as well as Europe there is a lot of momentum behind proposals to mandate the sharing of credit data for small and medium enterprises (SMEs) more widely than is currently the case. Such information sharing would facilitate greater competition among lenders by making it easier for rivals (that is, non-bank ones in particular) to identify and compete for good SME borrowers. However, a trade-off may emerge between good SME borrowers with a credit history and potentially good SME borrowers without one, given that lenders’ ability to offer low rates to untested borrowers is curtailed by the prospect of rivals’ poaching once their creditworthiness is revealed. Hence, in order to maximise the benefits of information sharing, a time-limited exemption for new SME borrowers is proposed to ensure that lenders’ incentives are not skewed against them.
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References and Notes
Besides the lack of reliable information about creditworthiness, lending to SMEs may be riskier given that SMEs are often inexperienced, have less pleadgeable collateral and typically lack pricing power in their product markets.
Stiglitz, J.E. and Weiss, A. (1981) Credit rationing with imperfect information. American Economic Review 71(3): 393–410.
Berger, A.N. and Udell, G.F. (2002) Small business credit availability and relationship lending: The importance of bank organisational structure. Economic Journal 112(477): 32–53.
See Sharpe, S.A. (1990) Asymmetric information, bank lending and implicit contracts: A stylized model of customer relationships. Journal of Finance 45(4): 1069–1087, Rajan, R.G. (1992) Insiders and outsiders: The choice between informed and arm’s-length debt. Journal of Finance 47(4): 1367–1400; and von Thadden, E. (2004) Asymmetric information, bank lending, and implicit contracts: The winner’s curse. Finance Research Letters 1(1): 11–23.
Bank of England (2014) Should the availability of UK credit data be improved? http://www.bankofengland.co.uk/publications/Documents/news/2014/dp300514.pdf, accessed 16 October 2015.
Competition and Markets Authority and Financial Conduct Authority (2014) Banking services to small and medium-sized enterprises, para. 5.136, https://assets.digital.cabinet-office.gov.uk/media/53eb6b73ed915d188800000c/SME-report_final.pdf, accessed 16 October 2015.
Small Business, Enterprise and Employment Act 2015, Part 1, Section 4, available at http://www.legislation.gov.uk/ukpga/2015/26/contents/enacted, accessed 16 October 2015.
See HM Treasury (2014) Improving access to SME credit data: Summary of responses, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323318/PU1681_final.pdf, accessed 16 October 2015. Nevertheless, the legislative provision leaves it open to the competent Government department to establish the level of granularity of the data that can be shared: Small Business, Enterprise and Employment Act 2015, Part 1, Section 4, subsection (5).
Small Business, Enterprise and Employment Act 2015, Part 1, Section 4, subsections (3)(b) and (4)(b). Nevertheless, consent may be obtained through a specific standard contract term: ibid., subsection (6)(d).
See European Commission (2015) Green Paper – Building a Capital Markets Union, SWD(2015) 13 final, p. 11, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0063&from=EN, accessed 16 October 2015.
See, for example UK Department for Business Innovation & Skills (2013) SMEs: The key enablers of business success and the economic rationale for business intervention, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/266304/bis-13-1320-smes-key-enablers-of-business-success.pdf, accessed 16 October 2015.
See, for example Wehinger, G. (2013) SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature. OECD Journal: Financial Market Trends 10(2): 115–148, Nevertheless, it is worth pointing out that there is evidence to suggest that access to credit for SMEs that rely on ‘relationship’ lending is less restricted than for ‘transactional’ lending during a downturn: see Beck, T., Degryse, H., De Haas, R. and Van Horen, N. (2014) When Arm’s Length is Too Far: Relationship Banking over the Business Cycle. EBRD Working Paper 169, London.
This last intuition is based on the ‘moral hazard’ framework, whereby the lender cannot control for the level of effort put in by the borrower, but, by committing to share data and thus facilitate switching, ensures the borrower has an incentive to do well, given the implied commitment to keep rates at competitive levels: see Padilla, A. and Pagano, M. (1997) Endogenous communication among lenders and entrepreneurial incentives. The Review of Financial Studies 10(1): 205–236.
See, for example, Chan, Y., Greenbaum, S. and Thakor, A. (1986) Information reusability, competition and bank asset quality. Journal of Banking and Finance 10(2): 243–253, The erosion of the ‘charter value’ due to intense competition entails that banks stand to gain from successful risky investment, whereas deposit holders bear the downside risk. This risk-shifting incentive is exacerbated by the inability of retail depositors to monitor banks’ investment decisions: see Keeley, M. (1990) Deposit insurance, risk and market power in banking. American Economic Review 80(5): 1183–1200. Similarly, in competing for borrowers by offering lower loan rates, banks might be exposed to the ‘winner’s curse’ problem, where the winning bank might have overestimated the borrower’s creditworthiness: see Broecker, T. (1990) Creditworthiness tests and interbank competition. Econometrica 58(2): 429–452.
Boyd, J.H. and De Nicolo, G. (2005) The theory of bank risk taking and competition revisited. The Journal of Finance 60(3): 1329–1343.
See Perotti, E. and Suarez, J. (2003) Last bank standing: What do I gain if you fail? European Economic Review 46(9): 1599–1622.
Gehrig, T. and Stenbacka, R. (2007) Information sharing and lending market competition with switching costs and poaching. European Economic Review 51(1): 77–99.
Borrowers/entrepreneurs are typically partitioned between high and low ability, whereby only the latter has a positive probability to achieve commercial success (that is, a positive NPV project) provided that a sufficient level of effort is exerted. The borrower knows his own type and this private information is revealed to the lending bank after an initial period. However, the standard model assumption that an untested would-be entrepreneur could confidently estimate whether he will be successful (that is, on an ex-ante basis) is highly questionable.
Competition and Markets Authority and Financial Conduct Authority6. (‘The entry of a full-service bank, or the expansion of a newer or niche bank into a full-service bank, may also face barriers when attempting to attract sufficient volumes of profitable customers to operate at scale. This can be a particular challenge given that the relatively low transactional revenues obtained from many smaller SMEs means that they are only likely to be profitable if a newer or smaller bank is able to acquire significant volumes of those customers’).
Specifically, there are two sources of dynamic/scale cost efficiencies: one related to the use of credit scorecards to better screen borrowers’ applications; and the second one to do with the use of Internal Rating-Based models – that is, as opposed to Standardised Approach models – that allow to set lower risk weights under regulatory capital adequacy rules.
See Yoo, C.S. (2004) Copyright and product differentiation. New York University Law Review 79: 212–280.
See Reuters (2015) Amazon looks to offer loans to sellers in China, seven other countries. 29 June, http://www.reuters.com/article/2015/06/30/us-amazon-com-loans-exclusive-idUSKCN0P90DW20150630, accessed 16 October 2015.
It is worth pointing out that the provision against refusal to supply refers to a situation where the claimant is seeking access to an upstream input which is deemed to be essential to compete viably. The defendant – subject to a duty to deal – is therefore normally dominant at the upstream level and it typically operates also at the downstream level (that is, in competition with the claimant). Whereas in forcing banks to share SME credit data there is no clear upstream–downstream (vertical) dimension, but it merely represent an attempts to facilitate smaller rivals to compete more effectively against larger ones. Hence, it could be argued that the analysis as to whether there would exist a ‘duty to deal’ under EU competition law in the present case is unorthodox to say the least.
Under Article 102 of the Treaty on the Functioning of the European Union, the identification of a position of market dominance is a requirement for a finding that an alleged anticompetitive conduct is in breach of competition law. Besides the normal case of individual dominance, a position of joint dominance can also in principle be established whereby rivals are deemed to coordinate their conduct, thanks to an unspoken collusive agreement. The issue of whether any of these circumstances would normally apply to the SME lending market is beyond the scope of this article.
It is fair to say that reliance on the ‘essential facility’ doctrine to assist disadvantaged rivals is very difficult in practice in the United States: see, for example, Lianos, I. and Dreyfuss, R.C. (2013) New challenges in the intersection of intellectual property rights with competition law – A view from Europe and the United States. London: Centre for Law, Economics and Society, University College of London (mimeo), London, pp. 42–43, https://www.ucl.ac.uk/cles/research-paper-series/index/edit/research-papers/cles-4-2013.
European Commission (2009) Guidance on the commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, 2009/C 45/02, para 81, http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009XC0224(01)&from=EN.
For an extensive review, see Nazzini, R. (2011) The Foundations of European Union Competition Law: The Objective and Principles of Article 102. Oxford: Oxford University Press, pp. 258–273.
2009/C 45/02, para. 83.
Case 7/97 Oscar Bronner v Mediaprint Zeitungs- und Zeitschriftenverlag, Mediaprint Zeitungsvertriebsgesellschaft and Mediaprint Anzeigengesellschaft [1998] ECR I-7791, paras 43–46.
The Court of Justice of the European Union developed this formulation in case the defendant refused access to IP rights: Joined Cases C-241/91P and C-242/91 Radio Telefis Eireann (RTE) and Independent Television Publications LTD (ITP) v Commission (Magill) [1995] ECR 743, para. 56.
Case T-201/04 Microsoft v Commission [2007] ECR II-3601, para. 563.
ibid., paras 570, 575–579 and 580–612.
This is the original formulation developed in Joined Cases 6/73 and 7/73 Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1974] ECR 223, para. 25.
Case IV/33.544 British Midlands v. Aer Lingus [1992] OJ C326/16; and Case T-301/04 Clearstream Banking AG and Clearstream International v European Commission [2009] ECR II-3155, para. 144.
Case T-201/04 Microsoft v Commission [2007] ECR II-3601, paras 643, 647, 648, 649, 652, 653 and 656.
The idea being that in the presence of demand-side frictions rivals must offer a price discount large enough to motivate switching – hence the need for an asymmetric treatment that lowers the expected acquisition costs. In this respect, the UK Competition and Markets Authority has clearly indicated that customer inertia is a main obstacle to ‘effective competition’ in the provision of banking services to SMEs: Competition and Markets Authority (2014). Retail banking market investigation – Statement of Issues, para. 30, https://assets.digital.cabinet-office.gov.uk/media/5462302a40f0b6131200001a/Issues_statement.pdf (‘(…) to drive effective competition, customers need to be both willing and able to access information about offers available in the market, assess these offers to identify the product that provides the best value for them, and act on this assessment by switching to their preferred supplier or product. If customers are not able to effectively shop around, choose and switch products and suppliers, competition will be weak which is likely to lead to worse outcomes for customers. We refer to this as weak customer response on the demand side. In addition, where there is a weak customer response, suppliers (the supply side) may have an incentive to create and/or enhance impediments to customers’ ability to shop around, chose and switch products or suppliers. Such impediments may also act as a barrier to entry or expansion’).
See, in this respect Lianos, L. (2013) Competition law remedies in Europe. In: I. Lianos and D. Geradin (eds.) Handbook on European Competition Law: Enforcement and Procedure.Edward Elgar Publishing, pp. 362–455, 434 (‘A remedy that would go beyond simply “mirroring the abuse” in an abuse of dominant case and which would have provided the infringer’s competitors an advantage over the infringer in order to restore the competitive process may be justified only in very limited circumstances (…). However, even in these cases, the remedy should be connected logically with the wrong that it aims to address’).
This formulation appears to frame this test as a cost-benefit analysis, whereby a duty to deal would be established whenever it is proven that consumers would be better-off, on a net basis. However, such an interventionist approach would run contrary to the view that under the current case law ‘[a] refusal to deal is subject to something akin to a presumption of per se legality under Article 102 TFEU’. See O’ Donoghue, R. and Padilla, J. (2013) The Law and Economics of Article 102 TFEU. Oxford: Hart Publishing, p. 558.
The OECD defines ‘process innovation’ as ‘[a] new or significantly improved production or delivery method’, http://www.oecd.org/site/innovationstrategy/defininginnovation.htm.
Case T-201/04 Microsoft v Commission [2007] ECR II-3601, para. 647.
See discussion in O’ Donoghue and Padilla,38 (pp. 555–557).
In the United Kingdom, where the Prudential Regulatory Authority is part of the Bank of England, the choice as to which institution should be in charge of the calibration ought to be obvious.
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Disclaimer: The views expressed are purely those of the writer and may not in any circumstances be regarded as stating an official position of the Bank of England (Prudential Regulation Authority).
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Siciliani, P. An intellectual property-based approach to the mandatory disclosure among lenders of credit data for small and medium enterprises. J Bank Regul 17, 288–295 (2016). https://doi.org/10.1057/jbr.2015.25
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DOI: https://doi.org/10.1057/jbr.2015.25