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The impact of machine learning and big data on credit markets

Author

Listed:
  • Eccles, Peter

    (Bank of England)

  • Grout, Paul

    (Bank of England)

  • Siciliani, Paolo

    (Bank of England)

  • Zalewska, Anna

    (University of Bath)

Abstract
There is evidence that machine learning (ML) can improve the screening of risky borrowers, but the empirical literature gives diverse answers as to the impact of ML on credit markets. We provide a model in which traditional banks compete with fintech (innovative) banks that screen borrowers using ML technology and show that the impact of the adoption of the ML technology on credit markets depends on the characteristics of the market (eg borrower mix, cost of innovation, the intensity of competition, precision of the innovative technology, etc.). We provide a series of scenarios. For example, we show that if implementing ML technology is relatively expensive and lower-risk borrowers are a significant proportion of all risky borrowers, then all risky borrowers will be worse off following the introduction of ML, even when the lower-risk borrowers can be separated perfectly from others. At the other extreme, we show that if costs of implementing ML are low and there are few lower-risk borrowers, then lower-risk borrowers gain from the introduction of ML, at the expense of higher-risk and safe borrowers. Implications for policy, including the potential for tension between micro and macroprudential policies, are explored.

Suggested Citation

  • Eccles, Peter & Grout, Paul & Siciliani, Paolo & Zalewska, Anna, 2021. "The impact of machine learning and big data on credit markets," Bank of England working papers 930, Bank of England.
    • Handle: RePEc:boe:boeewp:0930
    as

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    More about this item

    Keywords

    Adverse selection; banking; big data; capital requirements; credit markets; fintech; machine learning; prudential regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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