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Could dishonest banks be disciplined ?

Nabi, Mahmoud Sami and Ben Souissi, Souraya (2011): Could dishonest banks be disciplined ?

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Abstract

Could a credit bureau incite banks to report correct information about their borrowers? We show that banks will choose the incorrect information sharing in the last period to increase their profits. Interestingly, however, it is shown that this strategy is optimal at the second period only if the proportion of successful projects is superior to 50%. In that case the Credit Bureau should enforce a sufficiently high penalty in order to incite banks to share information honestly. The penalty threshold that conditions the efficiency of the credit bureau’s role is endogenously derived.

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