When do Banks Share Customer Information?

Most financial economists assert that full information sharing among banks about borrowers would best serve the banks’ and the borrowers’ long-term interest. In reality, banks are not always keen on supporting full information sharing. I propose that the type of information sharing is endogenous to the market structure.

I develop an infinite horizon model of banks' competition with overlapping generations of borrowers.

I show that in case the share of bad borrowers is small and banks incur similar marginal costs, fully rational banks would choose full information sharing. But information sharing only about bad borrowers is the banks’ dominant strategy if they incur largely different marginal costs of lending and the fraction of bad borrowers is substantial.Borrowers with good credit records, on the other hand, would prefer information sharing only about bad customers to full or to no information sharing, for they pay lower interest rates under a black list than with any other form of information sharing or with no information sharing.