What is it about?
When deciding to give a counteroffer to a mortgage client, a bank relies more on internal information, like payment history, than on data from a credit agency that is available to all banks. This leads to an informational asymmetry where mortgage clients with bad payment histories in the bank will be easier to acquire for a new bank.
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Why is it important?
When acquiring new clients, a bank must realize that these clients come with hidden risks. Some of the clients will have a seemingly good credit score while having a bad payment history or other negative internal information with the bank they currently use. These clients will be easier to get to switch.
Perspectives
Credit score becomes less important than internal negative information as the client-bank relationship develops. This creates an asymmetry between the home bank and its competitors.
Endre Jo Reite
Norwegian University of Science and Technology
Read the Original
This page is a summary of: Information asymmetry between banks, rent extraction, and switching in mortgage lending, Finance Research Letters, December 2022, Elsevier,
DOI: 10.1016/j.frl.2022.103339.
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