The Study in a Nutshell
A new BIS paper finds that Big Tech lenders using big data to assess creditworthiness hold informational advantages over traditional banks. This could disrupt credit markets by shifting the emphasis away from collateral. It could also weaken the transmission of monetary policy.
In a recent Deep Dive, we discussed how innovations in information and communication are challenging the traditional bank business models. This week we follow that thread with a paper that looks at more than two million Chinese firms that received credit from both an important Big Tech firm (Ant Group) and traditional commercial banks. It asks, do informational advantages, gleaned by fintech firms using machine learning and big data, have implications for collateral and monetary policy transmission?
The answer is yes. The credit offered to businesses via Ant Group correlates strongly to changes in the actual borrower firm’s characteristics. By gathering firm-specific data obtained by direct interactions on their platforms, Big Tech firms are able to assess the credit worthiness of a borrower based on their activities (transaction volumes and network scores) rather than the amount of collateral they can offer up.
Meanwhile, the credit that commercial banks offer correlates significantly to local economic activity and house prices. The banks require their SME borrowers to pledge tangible assets, such as real estate, to lessen ex-ante adverse selection problems. This collateral is far more susceptible to the local economic environment, and hence credit reacts more strongly to developments in activity and house prices.
This has important implications for monetary policy. Traditionally, business lending is tied to the net worth of individuals and collateral (often housing), which makes lending very pro-cyclical as represented by the ‘financial accelerator’ theory in economics. Should Big Tech lending start to dominate, then this link could be broken, which changes the dynamics between interest-rate sensitive sectors like housing and business lending.
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