<p><a href="https://en.wikipedia.org/wiki/Basel_II" rel="nofollow">Basel II</a> opened the possibility towards "your <em>individual</em> interest rate" by allowing (and encouraging) banks to use more advanced methods of estimating Credit Risk, individualizing even, customer-per-customer, for example using <a href="https://en.wikipedia.org/wiki/Advanced_IRB" rel="nofollow">Advanced-Internal ratings-based approach</a>.</p>

<p>This means that the banks <em>can</em> lower interest rates towards clients that score better according to these presumably more sophisticated methods of credit risk assessment. They are not <em>obliged</em> to do so (to the degree that interest rates are determined by the interaction of market participants and not decided by the state). On the other hand, by making credit risk assessment more accurate, banks can select the customers with good credit ratings because this, in the end, lowers their overall credit risk exposure and ultimately, lowers also the <em>obligatory</em> capital that they must hold.  </p>

<p>So indeed, individual credit rating and individual interest rates may increase the competition among firms and bring <em>contractual</em> interest rates down, reducing the banks' <em>nominal</em> profit rate -while it may keep intact the <em>actual</em> profit rate, since credit risk (and so, statistical losses) will also go down.<br>
Moreover this may lessen the burden of capital reserves. In some cases (and I would say, in the current situation), banks may even care more about the latter than the former.</p>

CC BY-SA 3.0
2015-06-27T17:51:26.503Z
2015-06-27T23:05:14.170Z
2015-06-27T23:05:14.170Z
Alecos Papadopoulos
<p>Discussing chapter 18 on Microeconomic Theory Basic Principles and Extensions - Nicholson and Snyder book - regarding Asymmetric information a student raise an interesting point of view regarding the available information on credit utilization, defaults and so on. According to him, in Brazil, the information from each customer (e.g.: if he has already defaulted anytime during his life) is not available and this is also because banks do not want. He mentioned that banks would have to provide better prices and fees for customers with a good historical behaviour on the use of credit lines and bank products. However, I was thinking and if we consider the capital ratio of a bank, provisioning and other charges banks has to deal with due to the lack of information of their clients, there would be a trade off. And banks wouldn't have great benefits from this lack of information on customers behavior. Additionally, banks could charge a reasonable interest and fees from all customers even if they know the probability of default of the customer is low. 
How does this work in other countries? Is the student opinion reasonable?</p>

CC BY-SA 3.0
2015-06-27T15:35:32.023Z
You mean banks refuse to obtain information on borrowers because banks would pay more for information than information tells them about borrowers (partly due to lower interest rates)?
Anton Tarasenko
CC BY-SA 3.0
2015-06-27T16:28:59.703Z
No, actually what I meant is that banks don't care about this information and in fact they would rather not have. With the information of which customer is a good borrower banks would have to offer better interest rates for these customers. And that it's not my opinion, it's the other student
dekio
<microeconomics><banking><asymmetric-information><capital-structure><consumer-credit>
Is the lack of information on customer behaviour good for banks?
dekio
# Is the lack of information on customer behaviour good for banks?

(Asked by: username_0 on 2015-06-27)

Discussing chapter 18 on Microeconomic Theory Basic Principles and Extensions - Nicholson and Snyder book - regarding Asymmetric information a student raise an interesting point of view regarding the available information on credit utilization, defaults and so on. According to him, in Brazil, the information from each customer (e.g.: if he has already defaulted anytime during his life) is not available and this is also because banks do not want. He mentioned that banks would have to provide better prices and fees for customers with a good historical behaviour on the use of credit lines and bank products. However, I was thinking and if we consider the capital ratio of a bank, provisioning and other charges banks has to deal with due to the lack of information of their clients, there would be a trade off. And banks wouldn't have great benefits from this lack of information on customers behavior. Additionally, banks could charge a reasonable interest and fees from all customers even if they know the probability of default of the customer is low.
How does this work in other countries? Is the student opinion reasonable?

**Tags:** microeconomics, banking, asymmetric-information, capital-structure, consumer-credit

> **Comments:**
> **username_1**: You mean banks refuse to obtain information on borrowers because banks would pay more for information than information tells them about borrowers (partly due to lower interest rates)?  
> **username_0**: No, actually what I meant is that banks don't care about this information and in fact they would rather not have. With the information of which customer is a good borrower banks would have to offer better interest rates for these customers. And that it's not my opinion, it's the other student  

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## 1 answers

### Answer by username_2 on 2015-06-27. Score: 1 | Accepted answer

[Basel II](https://en.wikipedia.org/wiki/Basel_II) opened the possibility towards "your *individual* interest rate" by allowing (and encouraging) banks to use more advanced methods of estimating Credit Risk, individualizing even, customer-per-customer, for example using [Advanced-Internal ratings-based approach](https://en.wikipedia.org/wiki/Advanced_IRB).

This means that the banks *can* lower interest rates towards clients that score better according to these presumably more sophisticated methods of credit risk assessment. They are not *obliged* to do so (to the degree that interest rates are determined by the interaction of market participants and not decided by the state). On the other hand, by making credit risk assessment more accurate, banks can select the customers with good credit ratings because this, in the end, lowers their overall credit risk exposure and ultimately, lowers also the *obligatory* capital that they must hold.

So indeed, individual credit rating and individual interest rates may increase the competition among firms and bring *contractual* interest rates down, reducing the banks' *nominal* profit rate -while it may keep intact the *actual* profit rate, since credit risk (and so, statistical losses) will also go down.  
Moreover this may lessen the burden of capital reserves. In some cases (and I would say, in the current situation), banks may even care more about the latter than the former.


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