banks’ risk profile by the banks themselves and by their supervisors (Pillar 2). But Basel III also brings new duties into the authorities’ agenda, which include identifying systemically important financial institutions (SIFIs) – which among other criteria are large and highly interconnected – and deciding on the countercyclical capital buffer – based on the ratio of credit (bank and non-bank) to GDP. As a result of this, it will be highly demanding in information gathering.<sup>11</sup> Despite the fact that only internationally active banks of Basel Committee member countries<sup>12</sup> will have to implement Basel III, in many other non-BCBS countries supervisors will also adopt it, as has been the case with Basel II. For those that do not, international banking groups operating in their jurisdictions will likely be implementing the most sophisticated approaches on a global basis; hence detailed data will be needed to support the home supervisor.

The paper is organized as follows. Section II explores how PCR data can be used to design the prudential regulation for credit risk. Section III describes the role of PCRs in bank supervision. Making use of the supervisory responses to the World Bank’s survey on credit reporting systems, it exemplifies how supervisors around the globe are taking advantage of PCR data to enhance their supervisory process. In Section IV, the paper describes how PCRs can support the implementation and supervision of Basel III, while Section V explains their importance in steering a broader macro prudential surveillance. Having determined the usefulness of PCR data for central banks and bank supervisors, Section VI characterizes the desirable features that public credit registries should have. Finally, Section VII contains some concluding remarks.

# **II. The role of PCRs in bank regulation**

Until Basel III becomes globally widespread and authorities admit the use of banks’ internal rating systems, regulatory frameworks for credit risk may not be completely aligned to the underlying risk of banks portfolios. However, loan loss provisions should be commensurate with expected or average losses, while capital is to cover unexpected losses. Bank capital acts as a buffer against unexpected bank risk therefore reducing the risk of bank failure and helps to control for moral hazard, mitigating the incentives to take excessive risk.

As long as PCRs contain sufficiently long historical data for the largest possible share of borrowers in the banking sector, the analysis performed with the information therein contained can assist in reshaping the prudential regulation for credit risk. By means of diverse data mining and econometric techniques, such as transition matrices and credit scoring models, and by deriving loss distributions from credit portfolio models, local authorities can better calibrate provisioning ratios and capital requirements to more closely reflect expected and unexpected losses for credit risk.

While banks may use their own internal rating systems to manage credit risk,<sup>13</sup> in many

> 11 For an analysis of the usefulness of credit bureau data in relation to Basel II see, for example, Trucharte Artigas (2004).

> 12 As of early 2009 the BCBS membership was expanded to include 27 countries: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

> 13 For a review of the range of practice regarding internal rating systems of financial institutions from G10 countries, see Basel Committee on Banking Supervision (2000).

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